Monday, January 5, 2009

I Am Trying to Rebuild My Credit

A low credit score -- generally defined as a FICO score below 640, according to The Credit Scoring Site -- can prevent you from obtaining a job, getting approved for a standard credit card, finding approval for home or car loans or even signing up for cellular phone, cable television or utility services. Raising your bad credit score is not a quick or easy process, but it is crucial to improving your financial future.

Pay Down Your Credit Card Debt

    The FICO credit rating algorithm, which all three major credit bureaus use to some extent, factors your debt-to-available-credit ratio into your credit score. In fact, this category, officially known as "amounts owed," accounts for 30 percent of your FICO score. Having high balances on your credit cards raises this ratio, thereby lowering your credit score. Paying down your credit card debt will lower that ratio, improving your standing with the credit scoring algorithm and raising your score.

Make Timely Payments

    Payment history accounts for the largest portion of your FICO score, at 35 percent. Therefore, it is essential for you to make timely payments on your bills, especially those directly tied to your credit profile, such as credit cards, medical bills and mortgage payments. You cannot do anything to erase past late payments (they stay on your report for at least seven years), but making timely payments will keep you from further lowering your FICO score.

Keep Those Credit Cards Open

    It may seem like common sense to close credit cards after you have paid them off to avoid the temptation to spend, but doing so will lower your credit score, according to Bankrate.com, a consumer finance advisory website. The FICO algorithm factors in the amount of credit a person has available, assigning higher scores to those with more credit. Canceling your credit cards will lower your available credit, dropping your FICO score.

Use Credit Cards Responsibly

    Although it may seem prudent to stop using credit cards entirely, completely foregoing credit card use will not improve your credit score. Instead, you should use your cards sparingly, making small purchases you can easily afford. An article in MSN Money recommends using a credit card to buy groceries and gas, and then paying off the balance before the due date. Doing this will show timely payments and positive credit activity, which will help your FICO score. Additionally, you will avoid costly interest charges by paying off your balance early.

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