The interest rate that you pay on a home mortgage or new car loan is based on your credit score. Generally, a score of 700 or higher will get you the best interest rates on a loan. But if your credit score is just a few points lower, you could end up paying thousands of dollars more in interest over the term of the loan. This should be incentive enough to improve your credit score. Unfortunately, a recent poll conducted by Opinion Research Corporation reports that little more than 25 percent of American consumers really understand that a credit score measures how much of a risk they are to lenders (see Reference 2).
Step 1
Cancel any non-essential credit cards. Apply for a new line of credit only when you need it. In addition, keep the balances on existing credit cards low. Being responsible about how you use credit can get you huge savings on the purchase of a home or vehicle because of all the money you can save in lower interest payments.
Step 2
Pay down balances on credit cards. Lowering the outstanding balances you owe on credit cards can raise your score significantly within two or three months. If your credit score is just slightly below where it needs to be to qualify you for a better interest rate, this is one of the fastest ways to improve it. Paying down credit card accounts can help boost your credit score even more than paying off installment loans.
Step 3
Spread out your charges over more than one credit card. This helps to keep individual credit card balances low and allows for more available credit remaining on your cards. It's better to use only 20 to 30 percent of the credit limit on a card than to have some cards with a zero balance and one nearly close to its maximum. Maxing out a credit card can lower your credit score by as many as 70 points.
Step 4
Make credit card payments on time. In fact, it's a definite plus in your favor if you pay your bills before the due dates and keep your balances low. Raising your credit score by 30 points can save you nearly $100 a year on finance charges. The longer you have a history of paying your bills on time, the higher you can raise your credit score.
Step 5
Contact a collection agency about removing a debt that appears on your credit report if you pay it off in full. This might be easier to do for smaller debts that you owe. Get the agreement in writing first before sending any money.
Tips and Warnings
- If you missed a payment to a creditor with whom you previously had a positive payment history, ask the creditor to erase the negative listing from your credit report. Writing a goodwill letter does not succeed in every case, but it may be worth giving it a try.
Member Comments