The Necessary Steps To Improve Your Credit Rating

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As of this year, there's a new credit rating model known as "FICO 08." The new model will be more forgiving of people who may have slipped on one payment but are otherwise in good standing. It also eliminates young students who wish to "piggyback" on their parents' good credit by appearing as an authorized user on a credit card. Basically, if you have one major account in delinquency but you also have a number of other accounts in good standing, then your credit score will increase with the new model. However, if you have one major delinquent account and a poor payment history across the board, then your credit score will decline. FICO says a 20-30 point adjustment is likely this year for many borrowers who fall into these categories. Getting your free credit scores from Equifax, Experian and TransUnion is the first step toward developing a reasonable financial plan.

Improving credit scores involves avoiding many things. In the order of importance, they are late payments, high credit card balances, closing credit card accounts and having too many in-store charge cards. Late payments carry 35% of the weight in terms of your credit score, so do not take them lightly, even if it's just a store charge card, a cell phone bill or a rent payment. Your credit score can drop by as little as 20 points or more than 100 points, depending on how often you are late and how many accounts you're late on, as well as whether you are 30, 60, 90, or more than 120 days late.

Secondly, your credit usage should be no more than 40% of what is offered to you. If your credit line is $1,000, then you should owe no more than $400, and that goes for all lines of credit you have open. If you have any maxed out cards, then pay them down until you hit the 40% mark! Some people think they should close out their accounts to "do the right thing" or "prevent overspending," although this will decrease your overall credit offering and will reflect negatively on you.

Instead, work on paying those balances down and once you're finished, aim to purchase one thing a year on those cards to keep them active, and pay them off right away. Lastly, opening and closing store charge cards just to get that 10-15% initial discount is a signal of irresponsible credit behavior and will not result in high scores for your credit.

While you're trying to improve your credit rating, there are a few common mistakes people make. First, avoid asking a creditor to "lower your credit limit." Some people assume that will mean less temptation to spend, when instead they should be exercising discipline, learning to live within their means and working at reducing the percentage of total credit used. Remember, you want to be using no more than 40% of the credit that's extended to you, so by closing accounts you'll actually magnify your debt. Secondly, don't make any late payments, as the first one always hurts worse, sometimes by as much as 100 points. The subsequent string of late fees don't take off as many points generally, but if you re-establish credit again, the worst thing you can do is to miss a payment. The third mistake is consolidating your accounts, since applying for new credit will take off 5-10 points. Applying for an installment loan will improve credit scores though.

Following a bankruptcy, foreclosure or bout of unemployment, improving your credit rating could become an obsession. It never feels good to know you've failed at something. If you're really knee-deep in debt, then you may need a credit counselor or debt relief service to help you sort out the mess. For the long-term, you need to renew your way of thinking about debt. Carefully record your monthly spending, writing down all your bills, incoming assets and expenditures. It can be really eye-opening to see where your money is going! Subtract your fixed expenses, such as rent/mortgage, utilities, auto loans, minimum credit payments from your monthly income and use the leftover cash to spread out to your debt. Make a list of your debts and interest rates, then begin paying the highest interest rate off first, while making minimum monthly payments on the rest. Be sure to take advantage of free credit report services each year at www.AnnualCreditReport.com to keep on top of things.