SIMPLE TIPS TO IMPROVE YOUR CREDIT SCORE

Here are some tips on how to improve your credit score before seeking a pre-approval letter.  Understanding "how" banks look at your credit and credit history is important.  If you don’t know what can hurt your score, you could make the wrong move.  Lenders are very interested in the ratio of your current balance to the available limit. They like to see that you can handle credit, but that you also won’t give in to temptation and use all your available credit.  For this reason, don’t consolidate all your cards onto one card. This will most likely change your ratio for the worse.  Let’s look at an example.

 

Say you have the following cards:

 

Credit card #1: balance $5,000/limit $10,000. Ratio 50%.

Credit card #2: balance $1,500/limit $7,500. Ratio 20%.

Credit card #3: balance $3000/limit $5000. Ratio $60%.

 

These are all in a decent range, which helps you have a good credit score. Now let’s say you consolidate, so that you take the total debt of $9,500 and put it on a card with a $12,000 limit card. This would put you up to nearly 80%, which would hurt your score. Even though your debt is the same, the ratio is now very high, which worries lenders.

 

You should also never request to lower your limit on a credit card. If you do, the ratio will increase, lowering your score.

 

For instance, if you had $1000 on a credit card with a $5000 limit, you’d have a 20% ratio. This is very good. If you request that they cut the limit to $2000, your ratio would increase to 50%. Even though your debt is the same, it is now a higher percentage of the total limit.

 

Another mistake people can make is to get rid of a bunch of older credit cards. They worry that lenders might not like that they have so many cards. The problem is that lenders like to see that you have a long track record with your creditors.

 

Lenders want to know that you can handle debt on a long-term basis because they are considering loaning you a large sum of money for 30 years. If you cancel your old cards, your score will go down. If you want to get rid of cards, start with the more recent ones.

 

It is also a bad idea to close an account which has a balance. If you have $20 on a card with an available limit of $0, that maxes out the card and drives your score down.

 

On the other hand, if you raise your limit you can lower your overall ratio and improve your score. The trick here is to have discipline and make sure that you don’t use the extra funds you now have available.

 

These tricks and tips might seem counter-intuitive until you understand the logic of the credit-scoring system. Following these guidelines can help raise your score and qualify you for a good mortgage loan.