Do You Need to Improve Your Credit Score?

Credit scores fall into four main tiers: prime, very good, average and subprime. Whats yours?

Credit scores determine your interest rate, loan limits, loan terms and whether you get an approval. With so much riding on your credit score, it's easy to wonder if you should improve your credit score. Any score less than 760 can be improved upon. After reaching a 760 credit score, you are in the prime category and do not need to actively improve your credit rating. You qualify for the best deals and terms at this point.

Credit scores fall into four main tiers: prime, very good, average and subprime. Tier one or prime credit falls between 760 and 850 points. Tier two falls between 725 and 759. Average credit is somewhere between 660 and 725. Subprime is anything below 659. The difference between a score of 760 and 659 equates to an increase of two percentage points in your interest rate and an extra $2,000 on a 30-year mortgage. On credit products with higher interest thresholds including credit cards and auto loans, you pay even more.

First, you need to know where you stand. Start by pulling your credit rating for all three credit reporting agencies: CallCredit, TransUnion and Equifax. You may also want to pull your FICO score. Keep in mind you have to pay to pull each score so it can get quite pricey. Many people mistakenly believe they have a good credit score simply because they pay their bills each month. Credit scoring is a complex mathematical equation taking your payments, age of accounts, types of credit, balances and credit applications into account. Neglect even one aspect of your credit report and you are in for quite the shock when you pull the number.

After purchasing your credit score, you need to understand what it means. Each credit reporting agency provides an overview of what is good and bad about your credit score. Focus on the issues that are negatively affecting your credit score to begin your improvement strategy. Where you begin to improve your score depends on what is wrong. The most common negative influences include too much debt, too many inquiries, accounts too new and derogatory information.

Steps to Improve Your Credit Score

Paying down your debt is a good way to boost your credit score. Try to get your revolving balances to less than 30 percent of your credit limit. Anything over 30 percent starts to look risky to potential creditors that you don't know how to handle your debt or you cannot afford to pay your bills in full.

Inquiries stop actively affecting your credit report after six months but appear on your credit report for two years. You can't do anything about existing inquiries but you can put any applications on hold until some of the inquiries begin to age off your report.

Give your existing accounts time to age before you add more credit into the mix. The age of your accounts equates to approximately 15 percent of your credit score. The longer you wait between opening accounts the better off your credit score is. Improving your credit score means waiting at least six months between credit card applications or lines of credit.

Derogatory information is a tough one to beat. The appearance of derogatory information on your credit report is a huge red flag to creditors. You didn't pay your bills in the past so why should the creditor trust you? Only time can heal derogatory information on your credit report. If you are suffering with just one late payment, you might try a goodwill letter to your creditor asking for it to be removed. Some creditors respond to these requests. Otherwise, that late payment stays for two years. Collection entries are another tough credit repair problem. Accurate collections entries are on your report for seven years whether you pay it or not. If you have the cash, you can offer to pay the bill in exchange for the removal of the information. This type of deal is called a pay for delete transaction. You need an agreement with the collections agency in writing for the removal of the entry.

Improving your credit score is a hands on process. Consider signing up for a credit monitoring service to avoid any unexpected credit activity. Credit monitoring services do charge but you get regular, real-time access to your credit report. Some credit monitoring services even offer monthly looks at your credit rating so you can track your progress over time.

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