If you are visiting my blog through the Canadian Tour of Personal Financial Blogs hosted by Money Diva thanks for visiting. This the second in a two part series about improving your credit score, the first part was posted an hour ago which discussed the basics of how your credit score is arrived at. This post builds upon the basics by providing several suggestions on increasing your credit score based on the basics. Enjoy.
- Pay every account on time- This sound really simple but there is real beauty in simplicity. If you cannot make payments, make sure you are never 60 days past due. Some creditors will not report you if you are under 30 days past due but they will definitely report you for 60 days over-due.
- Activity counts on each and every account- A lot of people have credit cards that they never use. I am advised that this actually hurts your credit score since your file isn’t “active” on particular accounts. Activity generally means that you are using a particular account every 3 months or so. I find the best way of keeping all my accounts active is to spread out my pre-authorized payments among several credit cards. For example, I have one credit card from my university days which I do not use since the rewards are non-existent; however, I set up a monthly pre-authorized payment on it for a small amount (my newspaper bill) and pay it off on time to keep a good and active credit history on this card (because the amount is so small, I am not losing a lot of points by not running it through my point lucrative credit card). The pre-authorized payment route saves me time in trying to figure out when to use which card when. I also draw down on my line of credit every so often, even if I don’t need the money, and pay off the principal the next day to keep a good history on my line of credit.
- If you have to, cancel the newest credit instrument first: Remember that credit history and debt to credit ratios count. If you cancel a long standing account (assuming its in relative good shape) you are erasing credit history and increasing your total debt to credit ratio since the available amount of credit to you just decreased pushing your ratio up. This is why I will not cancel my credit card I received when I was a freshman in undergrad.
- Divide the cost of large purchases among several accounts: If you buy a dishwasher and max out one credit card to do it, your debt to credit ratio increased to 100% on that account which decreases your credit score. Split the purchase of big ticket items between several credit cards and try to keep the debt to credit ratio on each card under 50% (i.e. only use 50% of the credit available under each card).
- Do not apply for a lot of credit at once: This is a particularly important tip for students who have just graduated or recent immigrants without a domestic credit history (why a credit score cannot be transferred internationally is beyond me). If you do need credit, try to consolidate it with one institution which only has to run your credit score one. For example, apply for a credit card and a line of credit at one bank or at the same institution that is administrating your student loan; it will only require one credit check and, if you subsequently apply for more credit at that same institution, at least they will know that all the new accounts are with them.
Good luck increasing those credit scores.
May 7th, 2007 at 5:39 pm
Hi ThickenMyWallet, I saw your blog on the recent Canadian Tour of Personal Finance Blogs. I recently discovered that I had a credit issue of my own - literally discovered! I thought I had closed a credit card account a long time ago and ignorantly discovered it when I requested my credit report.
Anyway, my question is, if you’ve had 2 credit cards for a long time, and you’ve transacted with them and paid them off regularly, will the 2 cards give you a better credit rating than 1 card with the same level of regular activity? That seems counter intuitive to me because I would think that this means that consumers would be rewarded with larger numbers of credit cards - shouldn’t it go the other way?
Thanks
SavingsJourney
May 7th, 2007 at 6:19 pm
Thanks for visiting the site and commenting.
To answer your question, and as counter-initiative as this seems, your credit score is better if you have more good accounts open but up to a point. If you have too many credit cards, you get penalized for having too many new credit facilities open (yes, its a strange system). I read somewhere if you have 3-5 good accounts open, you should be fine.
Also, if you only have one account open, and you miss a payment you have no way to spread the damage. At least with two accounts, even if you miss a payment on one (assuming you have good history on the other), you still have one account with good history. Hope that helps.
May 7th, 2007 at 10:48 pm
Thicken - is your reply to SavingsJourney the reason you haven’t just gotten rid of your old credit card? I have three cards (Amex, Visa, MasterCard), primarily for the purpose of ensuring at least one will be valid anywhere in the world I go, but I could probably get rid of the Visa or MasterCard since I haven’t found anywhere in a long time that doesn’t accept one or the other (except for Loblaw’s Superstore).
May 7th, 2007 at 11:23 pm
[…] site. Here is my take on a selection of the posts. Thicken My Wallet has a good post on how to improve your credit score. I must say I didn’t know all the details that he listed, so it was informative. I thought he […]
May 8th, 2007 at 1:24 am
Hi Thicken,
To be honest, I’m completely oblivious about our credit scores. My wife and I have a couple of credit cards and always pay off the balance each month. We simply go about our day-to-day lives without consciously looking to increase transaction counts, or determine the optimal number of credit cards. I’m sure every little steps count, however your tip #1 probably carries the most weight.
Financial Jungle Guy
May 11th, 2007 at 5:13 pm
Any idea what the impact is to ask for a credit reduction, assuming your credit cards are paid off or nearly done? What about store credit and other consumer loans? I’ve got a couple of store financing accounts that are still open even though I have no plan to use them, because I’m not sure what the impact will be of closing those accounts.
May 11th, 2007 at 7:20 pm
I keep hearing that good credit rating can help you get a lower mortgage rate - how?!
We have stellar credit scores and from what I could see we got quoted the same rate as everyone else. Should we have negotiated?
Any other benefits to having a good credit rating?
May 14th, 2007 at 5:48 pm
In the interest of addressing two posts in one response:
1. Briana- I would treat every account, regardless of whether it is a major credit card or minor credit card, with the same approach. Pay it off, keep a good history and keep the debt to credit ratio low. Without addressing the specifics of your situation, accounts which are active with good history are better than accounts which are not active with good history.
2. Re: Money- I would take any mortgage offer as merely an opening offer. Good credit ratings may, depending on the bank, allow you greater access to thinks like over-draft protection and other products which banks offer (especially useful for the self-employed).
May 23rd, 2007 at 6:47 pm
Hi Money,
Thicken makes some good points. In addition, it’s useful to remember that lenders generally look at the 5 C’s of credit to determine whether or not to lend you money.
These include: character(integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy).
If you’re judged well on all 5 of these criteria, you are typically eligible for the best rates.
Note, however, that once you achieve a good credit score (like 720) you’re generally not going to get a better rate by improving to great score (like 820).
February 20th, 2008 at 12:32 pm
Another tip, which only works if you’ve already defaulted on an obligation, is to ask the collection agency for the original paperwork. If they can’t find it, mainly because your obligation has probably already passed through several hands, then they can’t report it (http://www.followsteph.com/2008/02/18/a-lesser-known-secret-tip-to-increase-your-credit-score/)!
March 10th, 2008 at 5:14 pm
Great post!
I find it is a shame that people are not taught about this in school (at least i wasn’t) and that the majority of people find out about this the hard way
April 16th, 2008 at 2:21 pm
This sound really simple but there is real beauty in simplicity. If you cannot make payments, make sure you are never 60 days past due. Some creditors will not report you if you are under 30 days past due but they will definitely report you for 60 days over-due.