What are some ways to improve my credit score?

For many borrowers, only one thing stands in the way of securing a home loan: their credit history. The mysterious three-digit numbers that lenders rely on for approval decisions imparts a lot of information about your financial history. These scores predict your risk to a bank as a borrower. The higher the number, the better risk you are.

Where the numbers come from

The Fair Isaac Corporation reports your loan information to the three major credit bureaus: Experian, Equifax and TransUnion. Each calculates a “FICO” score based on certain factors. These factors include your payment history, how much you owe, what types of loans you have, and how long you’ve had them.

Credit scores range from 300 to 850. A score of 720 or higher would generally be considered excellent. From about 719 down to 680 is good, while 679 to 620 is pegged as average. A score below 620 dips into “poor” territory. A would-be borrower with poor credit may be unable to qualify for a mortgage at all, and may have difficulty obtaining any loan. Any loan he or she manages to get is likely to come at a high cost, with a high interest rate and possibly onerous penalties or fees.

Your biggest takeaway on FICO numbers is that your payment history and how much you currently owe count for 65 percent of your score. That means that always paying your bills on time and keeping your balances low puts you more than halfway to the goal of excellent credit.

Credit formula

Improving a score takes time

If your credit score is terrible, you can improve it over time – even if you have a bankruptcy, a foreclosure, settlements or liens in your past. Starting now, always pay your bills on time, because on-time payments are the most important factor in the quest for excellent credit.

Don’t max out your credit cards. Always keep your balances to less than 40 percent of your available credit, because this counts almost as much as paying on time. If possible, maintain a mix of loans. Housing loans are the best quality, because they’re the most difficult to get. Auto loans come in second, and credit cards bring up the rear. Finally, don’t close out old lines of credit, because lenders like to see customers who maintain long banking relationships.

There are no easy fixes when it comes to improving credit – there is only discipline, hard work and perseverance. Over several months, if you reduce your outstanding balances and pay your bills on time, your scores will rise.

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