Improving a Credit Rating

It’s great if you can pay cash for everything. If you are like most of us, you’ll have to borrow money to get into that dream house or buy a new car. Good credit is like a password: it opens up doors, and not just when it comes to borrowing money. Whether or not you get hired might depend on your credit rating. There’s nothing mysterious about improving your credit rating. It’s all about risk. The better the odds you’ll repay a debt, the better your credit. All you have to do is follow a few simple rules and watch your credit score improve.

Step 1

Monitor your credit history. You should periodically check the record of your credit that is maintained by the three major credit reporting companies: Equifax, Experian and TransUnion. Under the Fair Credit Reporting Act, you can initiate a dispute abut incorrect information and have it corrected. All three credit reporting companies allow you to file a dispute online.

Step 2

Pay all your bills on time to improve your credit rating. This is the single most important factor affecting your credit rating. A rare delinquency of a few days won’t hurt a lot. However, even one payment 30 days or more late can substantially lower your credit rating and may stay on your credit history for a couple of years.

Step 3

Reduce excess debt. If you have too much debt for your current income, the risk you pose to lenders increases. This lowers your credit rating. Conversely, reducing your total debt makes you a better risk and is viewed as a sign of good money management.

Step 4

Keep unsecured debt to a minimum. Unsecured debt is any money you owe for which there is no collateral, such as credit card debt. Avoid “maxing out” credit cards. If you have a lot of credit card debt, focus on paying it off first to improve your credit rating faster.

Step 5

Refrain from applying for new credit accounts on impulse and avoid closing existing accounts more than once or twice a year. Constant changes in your accounts increase your risk as a borrower. However, this information is only kept on your credit history for a short period, usually under one year. Not opening and closing accounts is thus a quick way to improve a credit rating.

Step 6

Apply all of the above principles consistently over time. Part of your credit rating is based on how long you have used credit responsibly or badly. Good financial management will steadily improve a credit score.

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