Credit Score: How is it measured and the way to improve it fast

Credit Score: How is it measured and the way to improve it fast

Are you wondering how to effectively improve your credit score? Do you have no idea where to even begin? Here you will learn the basics on how to set up your credit with the right mix. 

It is very important to have open credit lines in order to establish a positive credit score. If you currently have a credit score of “N/A” or are missing scores on one or more of the three credit bureaus

You will have take a look at the following:

How is your credit scored?

  • Payment History – 35%
  • Capacity (balance limits) – 30%
  • Length of Credit History – 15%
  • Type of Credit – 10%
  • New Credit – 10%

Do you have any open “revolving” trade lines that you are currently paying on?

Revolving credit is called open-end credit because the length of the loan isn’t fixed — it’s ongoing. The two most important terms of a revolving credit loan are the line of credit and the interest rate. The line of credit is similar to a credit card limit. Essentially, it’s the maximum amount of money you can borrow at any given time. The interesting thing about credit cards is that the issuer of the card can change your credit limit and interest rate at any time. But we’ll talk more about this later.

If you do not have any open credit cards you will need to establish 2 revolving credit accounts.

A home equity line of credit is another popular form of revolving credit. Like with credit cards, a credit limit is placed on this account. The credit limit is based on the equity in your home. You can calculate equity by subtracting any outstanding mortgage payments from the current value of your home. So the longer you’ve been making mortgage payments, the more equity you’ll have built up in your house

Do you have any open “installment” trade lines that you are currently paying on?

Examples of installment debt are auto loans, mortgages and student loans. According to Sweet, having a good history with revolving credit will help you qualify for the best interest rate when you do decide to take on debt.

Now, we are not suggesting you run out and buy a new car, or get a student loan, but it’s important that you have the right kind of “mix” on your credit report. For example, you can get what is called a “secured credit builder loan”. This is an installment loan in which you will make monthly payments to pay off a, let’s say, $1000 line of credit and the end of 24 months you will have a $1000 CD on your name that will be reported to all three credit bureaus.

Always keep in mind that what lenders want to see is 3 open trade lines. Two of them being “revolving” and one “installment” loan. Having this will give you the best mix of credit and will provide you with the highest scores with the credit bureaus. It is also important that you remember to always keep your Revolving credit card balance under 30% of the available credit to maximize your credit score.

Making sure you have a positive history with all your accounts is important, especially if you have a thin credit file. According to Gail Cunningham of the National Foundation for Credit Counseling, the good news is that “if a person only does two things right, pay their bills on time and not utilize more than 30 percent of their available credit, depending on their situation, it is likely that their credit score will improve.”

If you have more questions or need any specific information on how to improve your credit BabyBoomers Financial can help you with this and much more. Feel free to contact us or a free consultation and take control of your financial freedom today.