Thursday, January 22, 2009

Cleaning up your credit Part IV

Hopefully by now you've had a chance to check your credit score and have had a look at your credit report.

In today's post, I'd like to offer some basic tips to improve your score over time if you've found that it's less than favourable. Remember, your score is fluid. A great or poor score today can change each month and for the better or worse, will change dramatically within a year's time of positive or negative habits.

  • Always pay your minimum payments on time. Sounds simple and axiomatic, but many individuals miss their minimum payments periodically, which can drastically pull down your score. Enter your debt payment due dates on your calender as a reminder. Even one day late can register a blemish on your report which stays there for 6 years.
  • If you're maxed out on your credit cards, pay more than your minimum payment. You never want to be "over limit" on your cards as this too will significantly pull down your score. For instance, if one of your cards has a credit limit of $3,000 and you're right at the max, paying the minimum payment of let's say $120 requested by your credit card company will not likely cover your interest due at the statement date (this is also the date your company will report to the credit agencies). Let's assume the interest on your card is actually $140, that would put you $20 over limit right at the time they report to the credit agencies. Furthermore, you must budget for your annual fee, insurance protection, etc.
  • Keep your balances low. Ideally, you should not have more than 75% used of your card's limit. For example, if you have a credit card with a credit limit of $10,000, keep that balance under $7,500.
  • Don't seek new credit. The worst thing you can do if your score is low is to seek new credit (a sign of possible trouble). See my last post on hard and soft hits/inquiries.
  • Get rid of high interest credit and department store cards. Not all debt is viewed equally. Two department store cards vs. two traditional VISA or MasterCard accounts would be less favourably viewed and thus impact your score negatively. The thought is that a department store card is easier to approve for than a conventional credit card.

If you find that you have a number of debts with high interest rates, you may wish to speak to your banker about a consolidation loan (a loan that would pay off all your higher rate cards with a low rate, forcing you to pay a set amount and pay down the principle costing much less over time). However, if your score is low, talk to your banker first about the likelihood of them approving such a loan before they pull your credit report.

If you need to rebuild trust with your banker or positive credit habits on your credit report, consider a cash secured loan (you'd provide say $1,000 and the bank would lend you $1,000 - the point to show a positive repayment history and thus build up your score) or a cash secured credit card.

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