When you apply for credit, banks evaluate your credit risk by examining your FICO® score. The higher your FICO score, the lower your perceived risk is to a lender.
Below are some tips on how you can improve your FICO score:
• Have credit cards, and use them responsibly. In general, having credit cards and installment loans (and making payments on time) will increase your score. Someone with no credit cards tends to have a higher credit risk than someone who has managed credit cards responsibly. Don't let your credit cards reach their limit or spend beyond your means.
• Keep track of your score. Use a service like myFICO Score Watch to check your FICO Score regularly. This service also alerts you every time your score changes.
• Always pay your bills on time. Delinquent payments and collections will negatively affect your score since paying your bills by the due date accounts for 35% of your FICO score. The longer you make timely payments, the better your score will be. If you have missed any payment, get current and stay current. One skipped payment could drag you down from a good rating to a horrible one.
• Try to pay your credit card balance in full each month. At the very least, make the minimum payment by the due date. Having a high balance can adversely impact your score. The less you owe, the better your FICO score becomes.
• If you have problems paying your bills, contact your creditors or a legitimate credit counselor. In many cases, they will work with you to figure out a payment plan. This won't improve your score immediately. However, if you can start to manage your credit and make timely payments, your score will see an improvement over time.
• Don't close unused credit cards in an attempt to improve your FICO score. When you close an account, it will have a negative effect on your debt-to-credit-limit ratio, which contributes to 30% of your FICO score. For example, you have four cards, each with a credit limit of $5,000, making your total combined credit limit of $20,000. You currently have a balance on one card of $4,000. In this case, your debt-to-credit-limit ratio is 20% ($4,000 divided by $20,000). Now, you may think that closing down your other accounts would improve your FICO score, but it is to the contrary as it would worsen your score. In the above example, if you close your three other unused cards and have only one card open, which has a credit limit of $5,000, and you have a balance of $4,000, your debt-to-credit-limit ratio will be 80% ($4,000 divided by $5,000) - bad news for your score. It's hard to believe, but you are better off having the additional cards open and unused.
• If you have a high debt-to-credit-limit ratio, call your banks to raise your credit limits. Having the credit limits raised on each of your card would lower your ratio. It makes a big difference to your debt-to-credit-limit ratio.
• If you are a new credit user, don't open too many new accounts within a short period of time. If you don't have a lot of other credit information, new accounts will lower your average account age, and this is a negative factor. Also, having a lot of new accounts too rapidly can make lenders perceive you as a risky customer as they would think you are about to go on a shopping spree.
• If you change your address, inform your creditors about your new address as soon as possible. You don't want to run the risk of losing your bills or receiving them late.
• If your credit card is lost or stolen, report it immediately.
• Request and check your credit report. You can request a free copy of your credit report once every 12 months from each of the U.S. credit bureaus - Experian, TransUnion and Equifax. It won't affect your score.
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