Economics - Improving Your Credit Score
If you look at article on FICO Score published earlier, you will see the following information:
1. Your payment history - 35%
2. Length of your credit history - 15%
3. Amounts Owed - 30%
4. Credit Types - 10%
5. New Credit - 10%
The major facors that can affect your credit history is your payment history (35%) and amount owed (30%). If you are planning to make a big purchase like buying a new home or car, then you must keep eye on your credit score. Rather than applying for credit directly, check your credit score first and analyze yourself that whether you would qualify for the loan and take the decision.
How to improve your credit score?
1. You must have at least two or more credit cards. In case, if you have only one credit card and you do not quality for new credit card, then go with "Secure Credit Card". Under "Secure Credit Card", you will not have any credit inquiry. The credit limit is set with your initial deposit. The advantage is you will have credit history being reported to your credit file.
2. Take advatange of your spouse credit card. Either add your self to your spouse credit card if the credit card balance is low and the available credit is high. Otherwise remove yourself from your spouse credit card, if the credit card balance is high and available credit is low.
3. If you have US$ 10,000 credit limit, make sure you use only less than 15% on the card. This applies to all the cards you have. If you have 4 cards for instance, then have account balance only in two cards and keep the other two paid off in full.
4. If you have high balance on your credit cards, pay them off.
5. Do not try to close your older account.
6. Try to minimize the number of inquiries on your credit file.
7. Know your credit score from any popular bank and credit bureau (equifax, experian or transunion)
Scenario:
Assume that your credit score is around 650 and your current cards are having the below status:
| Credit Card No | Credit Limit | Current Balance | Usage | Available | Type |
| 0010 | 10000.00 | 3000.00 | 30.00 % | 70.00 % | Self |
| 0020 | 10000.00 | 2000.00 | 20.00 % | 80.00 % | Self/Spouse |
| 0030 | 5000.00 | 1000.00 | 20.00 % | 80.00 % | Self |
| 0040 | 2500.00 | 2000.00 | 80.00% | 20.00 % | Self |
| 0050 | 2500.00 | 2000.00 | 80.00 % | 20.00 % | Self |
| All Cards | 30000.00 | 10000.00 | 33.33% | 66.67 % | Self |
Now to get a better score closer to 700, you can split the above 5 credit cards accounts in the following way.
| Credit Card No | Credit Limit | Current Balance | Usage | Available | Type |
| 0010 | 10000.00 | 500.00 | 5.00 % | 95.00 % | Self |
| 0030 | 5000.00 | 0.00 | 0.00 % | 100.00 % | Self |
| 0040 | 2500.00 | 0.00 | 0.00% | 100.00 % | Self |
| 0050 | 2500.00 | 0.00 | 0.00 % | 100.00 % | Self |
| All Cards | 20000.00 | 500.00 | 2.50 % | 97.50 % | Self |
| Credit Card No | Credit Limit | Current Balance | Usage | Available | Type |
| 0020 | 10000.00 | 9500.00 | 95.00 % | 5.00 % | Spouse |
By comparing the two tables, you will see the credit limit and current balance are same. But the available credit went up from 66% to 97.5% and you have 3 accounts paid in full and one account with a balance. This will increase your score substantailly.
However your spouse credit score will get affected drastically and will come down by even 50 points. If you want to make big purchase on your own, then you can increase your score in this way. However it will work out only in the short run. Doing this helps one spouse in getting high score by affecting the other but still you are reponsible for paying them.
NOTE: The score is a only rough estimate and the score may affect with collection / public records, and other delinquenct accounts on your file. Check with your financial advisor before making any decision. This article is meant for learning and educative purpose only.
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