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Friday, April 22, 2011

How to improve your credit score?


The best way to improve your credit score (FICO score) is to understand the factors affecting it. Following are the factors determining your credit score.

Payment History
It is the most important factor in deterring your credit score. It accounts for at least one third of your total score.

How long ago did you miss the last payment?
Missing payment/s negatively affects your credit score. If you missed a payment long time ago, your score will be less reduced. If you missed a recent payment, your score will be more reduced.

How many payments did you miss?
Missing more numbers of payments negatively affects your credit score. If you missed less numbers of payments, your score will be less reduced. If you missed more numbers of payments, your score will be more reduced.

How late was the payment?
Late payment negatively affects your credit score. 30 day late payment is bad. 60 day late payment is worse than 30 day late payment. Defaulting is worse than 60 days late payment.

Credit Utilization Ratio
It accounts for around one third of tour total credit score.
Lower the credit utilization ratio is, higher the credit score is.
Credit utilization ratio = 100 * utilized credit / total credit limit

For example, if your total credit limit is 10,000 and you are using 3,000, then your credit utilization ratio will be 100 * 3,000 / 10,000 = 30%

Length of Credit
It accounts for around 10-15% of your total credit score.
Longer the history, higher the credit score.

Number of Credit Inquiries
It accounts for around 10% of your total credit score.
When you apply for a credit/loan, lender check your credit report and credit score, it is called hard inquiry on your credit. A credit inquiry stays on your credit record for two years.
Higher number of credit inquiries, lowers the credit score.

Type of Credit
It accounts for around 10% of your total credit score.
Combination of auto loan, mortgage and credit card is better than concentration in just one type of credit generally credit card is better.
It doesn’t mean that I will apply for all type of credit and pay interest on them. It’s better to take less debt. In fact its better not to borrow anything and stay debt free forever.

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