The Credit Score
The contents of your credit report can make or break your next loan application and your ability to borrow money. A good FICO score is the key to success. However, if your credit has taken a beating in recent times, you will have to do a little dusting off. The good news is that there is hope, and you can impress a loan officer by putting these strategies to good use.
How lenders gauge your credit worthiness
There are other factors lenders look at when underwriting a loan. To keep track of all these factors in today’s credit-driven environment, lenders use FICO scores to put everyone on a standardized scale. Doing this is useful in making quick decisions about a borrower’s:
- - loan balances
- - ability to pay it back
- - payment history
- - history of seeking credit
To repair your credit, follow the steps below and your FICO score will improve accordingly.
Step 1: You need a plan
Planning on applying for a loan before you do can affect the outcome. If you have a poor credit score, a window of 3-6 months will give you plenty of time to make important changes. What is most unfortunate is how little attention people devote to planning.
A poor (or less than exemplary) credit rating will hinder your approval status, but also the interest rate you'll be approved for. As such, planning before applying not only improves your chances for getting approved, but it also saves you money in the long run by lowering your borrowing costs.
Step 2: Pay down loan balances
Put simply, if you are using all of your credit (or worse, exceeding it) you aren't likely going to get approved for more debt.
As a rule of thumb, you should not go over 75% of the credit limit of any account. Notice how I’ve said the credit limit for each account rather than all of your accounts combined. If you have a credit card with a $ 1,000 limit, pretend the limit is only $ 750 and stick to that limit. Apply the same formula to all of your other cards and their respective limits. This can impact your score noticeably, which helps you if you try to borrow money later. Use the next 3 to 6 months to bring your limits down to ideal levels.
Step 3: Know about your ability to pay
Aside from usage, there is another factor that relates to loan balances that can affect you. If you have too many accounts open and not enough income to service those accounts, lenders might classify you as a risk that they’re not willing to take.
Unfortunately, if this is the case, there’s little you can do. You can pay off your balances, which is good for your FICO score to begin with, but it won't get rid of excess credit, which will still affect debt ratios.
If you're tempted to close unused accounts, think again. Closing down various accounts is not always a good idea because that can affect you credit negatively. The only advice I have here is to refrain from opening up useless accounts in the first place (like department stores or specialty cards that you really don’t need in the long run) and simply lower your balances. Working to improve other factors will help your score overall.
Step 4: Shape up payment habits
If you have had many late payments in the past, your score is bound to be bruised as a result. That said, if you improve your payment history from today forward, the activity will be reported and you'll boost your FICO score. Vow to make all of your payments on time – from this day forward!
Step 5: Do not seek credit
If you plan to apply for a loan in the next 3 – 6 months, do not seek any credit whatsoever between now and the time that you apply. Every time you try to get credit, you get a "hit" on your report. Hits lower your FICO score slightly. While they don’t make huge impacts, having plenty of them (and, being subsequently rejected) is not a good situation for prospective lenders to discover when they pull your report.
Put the above strategies into play and you will start to see dramatic improvements in your FICO score. To borrow money, lenders just want to make sure you are a good credit risk. They actually want to lend out as much money as they can. That is how they profit, after all. That said, lenders have a priority before profits which is to protect capital. If you do your homework, and have a plan in place and use some of the tips we've discussed, you can come out ahead.
