Bump Up Your Credit Score

To get the best deal on a loan today, you need better credit than ever before

We’re in the middle of a credit crunch, and getting an installment loan – whether it’s an auto loan, a home loan, or a personal loan – requires better credit than ever before. Creditors have their guards up and lending standards are becoming increasingly strict.

The most common credit-scoring model used by lenders is the FICO score. The FICO model (originally Fair Isaac) was established in 1956 by an engineer named Bill Fair and a mathematician named Earl Isaac. A FICO score can range from a very risky 200 to a perfect 900.

In a recent CNNMoney.com report, John Ulzheimer, president of consumer education at Credit.com, stated that FICO requirements are on the rise: “You need a 750 or better today to have the same treatment you got with a 700 two years ago,” he says. John D’Onofrio, CEO of Autoloandaily.com, concurred: “Two years ago a 680 was enough to get a great car loan rate. Today it’s often the minimum to qualify at all.”

How to maximize your FICO score

If you’re thinking of borrowing money (other than hard money loans like small payday loans or emergency cash loans that don’t require credit checks) you need to do everything you can to boost your FICO score before you apply. Here are some things you can do to maximize your credit score:

Find your score

You can get free estimates of your credit score at any number of websites (like Creditkarma.com). But if you’re serious about getting an installment loan on the best available terms, you need to see what your lender will see. Lenders will be looking at your actual FICO score, based on credit reports from three credit bureaus: Experian, Equifax, and TransUnion. To get a better sense of what lenders will actually see, for a small fee you can get one representative FICO score at myfico.com.

Look for mistakes

According to a Zogby International poll, one-third of people who pull their credit reports find errors, so check yours closely. When you get your FICO score at myfico.com, you’ll get a copy of the report it was based on. You’re entitled to one free report from each of the three credit bureaus every 12 months. So once you have your score and the report it was based on, you can get the other two reports for free at annualcreditreport.com

If you find errors, request corrections, following the instructions on each credit bureau’s website. Inaccurate delinquent marks are common. Fixing just one of those can improve your FICO score dramatically.

Never be late on payments

Your payment history is the most important part of your credit score. Lenders can’t report late payments to the bureaus until they’re 30 days past due. But keep track of your payment due dates and take precautions not to be late at all.

If you know you can’t pay a bill on time, think about getting a quick payday loan to pay the bill. If you will be able to get by on your next paycheck after paying the loan back, a cash advance can save your credit score, but don’t let payday loans become a habit. If you make a late payment, getting right back on track will eventually improve your score, but if you fall more than 30 days behind, the damage to your FICO score can haunt you for years.

Don’t use more than 20% of your total available credit

Another important factor in calculating your score is how much you owe compared to how much credit is available to you. According to Ulzheimer, 10% is ideal, but a ratio as high as 20% is acceptable. Unfortunately, banks are scurrying right now to raise interest rates before new regulations go into effect, and they’re also rushing to lower credit limits and cancel unused accounts, all of which make it more difficult to maintain an ideal ratio.

Be aware of the limits on your credit accounts, watch closely for changes on your monthly statements, and don’t use more than 20% of your available credit on any card or in total. If you’re thinking about getting a home or auto loan, try to reduce your account balances even farther before you apply.  If you’re working to pay down your debts before applying for new credit, remember that it may take a couple of months before reduced balances will appear on your credit report.

Preserve old accounts

A long credit history without late payments is the most important part of your FICO score. Closing old accounts not only increases your credit utilization ratio, it shortens your credit history.  So don’t cancel your oldest cards. You can avoid having lenders close old accounts by transferring recurring charges to them from the accounts you use more regularly.

Don’t try to out-smart the credit bureaus

Other, less important factors are involved in calculating your FICO score, but they are more difficult to manipulate. For example, part of your score is based on your mix of credit types, such as mortgages, car loans, and credit cards. But don’t buy a car or apply for new credit cards just to boost your score. The effects of new credit on a FICO score are complicated, and it is much easier to improve your score by carefully tending a few long-standing credit accounts and making your payments on time.

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