Advice on Better Credit Rating

Hi Arya,

Continue to pay your bills on time as you are already doing. Apart from that you must keep checking your credit report from time to time to find out whether there are any account listings that you do not owe. If you have a past record of paying bills at regular intervals then add them to the credit report. Try and get a departmental store card or gas card as these help in boosting your credit score.

You can consider getting a secured credit card as this is one of the best ways to improve damaged credit scores. You need to deposit the amount of money that you decide will be your credit limit. You will get the card against this deposit. The creditor will use the money as collateral for your credit card. The credit limit for your secured credit card will either be 50% or 100% of the amount deposited. However, remember to use this card properly since you will be using it to build a better credit history. Hence, make the payments regularly.

In order to build a positive credit history, and thus establish and maintain a good credit score, you must open, use, and timely pay credit accounts that regularly report to the three major credit bureaus (Equifax, Experian, and TransUnion).

Accounts that should help you build your credit rating by reporting positive payment information to the credit bureaus include auto loans, home mortgages, credit cards, and personal loans. A person with no credit accounts, like the friend you describe in your question, would have neither a negative nor a positive credit history; rather, he would have no established credit history which would make lenders hesitant to loan him money as they would have no information to judge his credit risk. From a lender’s point of view, having no credit is similar to having bad credit, as lenders generally do not want to lend money to someone who has no past history of paying his creditors on time.

Thankfully for consumers with no established credit, it is generally much easier for them to establish a good credit history than consumers with past credit problems. Consumers with negative credit listings, such delinquent accounts, must establish new positive credit lines to try to counterbalance the negative impact of their delinquent items. However, consumers with no established credit history do not have any negative listings weighing down their credit score, so opening credit accounts and making their payments timely should build a positive in a relatively short amount of time. And the longer they make their payments on time, the more their credit ratings should improve.

As you are inquiring about credit scores let me give you some information on how it is calculated. It is important to understand how your credit score is calculated. Your credit rating is calculated based on several variables as below-

1) Payment History-

Payment history counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

2) Total debt and total available credit-

Total debt and total available credit counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.

3) Length of positive credit history-

Length of positive credit history counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.

4) Mix of types of credit-

Mix of types of credit counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

5) The number of new credit applications you have recently completed-

This accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.