Do's and Don'ts when you improve credit score

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Do's and Don'ts when you improve credit score
2 years ago
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A poor credit score can affect your chances of being approved for new credit or can even hinder your chances of being hired for a new job. Fortunately, a less than impressive credit score can be rectified if you know how best to go about this.

Pay off your debts
This is one of the most important things to do when looking to repair your credit score. For many people, carrying debt will be the primary reason for having a low credit score. This is not as bad as it might sound as you can improve your credit score by paying off your existing debts. Your payment history makes up as much as 35 per cent of your overall credit score, so it is an area that you should look to address if you need to. This does not necessarily mean that you need to pay off all of your debts in one go to achieve a better credit score - unless you have enough in your emergency fund to do this and still have some money left over for the unexpected expenses that may crop up in the future. Instead, you should always pay your debts on the due date, as on-time payments will go some way towards improving your credit score.

Check your credit report
Your credit report is a record of any credit that you have used or applied for. This typically includes credit cards, loans, mortgages, utility bills, mobile phone contracts, insurance policies and bank accounts. You are entitled to one free annual credit report from each of the major credit reporting agencies (Experian, Equifax and TransUnion). Take advantage of this to keep on top of your credit report. As you can receive all three, it is a good idea to stagger your credit report requests throughout the year so that you can track any additions to the information contained in your credit report. Even if you are confident that your credit report information will not change, you should still make a point of ordering a credit report from each of the credit reporting agencies as they do not always include the same information. This means that creditors will have access to different information about your credit usage depending on the credit reporting agency from which they request your credit report.

When you receive your credit report, you may find that there are errors that can affect your credit score. For example, if you have had debts written off through bankruptcy, these debts should be labelled as having been closed or settled. If this is not the case and they are still showing as open debts, it can lower your credit score. If you notice any incorrect information in your credit report, write a letter to the credit reporting agency detailing the errors.

Be careful with credit limits
Do not be tempted to max your credit cards to the available credit limits, as this will reduce your credit score. As a general rule of thumb, you should never exceed 30 per cent of your credit limits. For example, if the combined credit limit on all of your credit cards is $15,000, you should never have a balance of more than $4500 across all of your credit cards. Going beyond the 30 per cent mark indicates that you are living predominantly off credit and are using money that you do not actually have. Because of this, you are deemed to be at a higher risk of defaulting on payments and your credit score drops accordingly.

Do not cancel credit cards
Contrary to popular belief, it will not help your credit score if you suddenly cancel credit cards. This suggests that you are experiencing severe money problems, which will worry your creditors. The length of your credit history makes up 15 per cent of your credit score, so it makes little sense to cancel credit cards that you have had for years. Creditors like to see that you can handle using credit over several years as it indicates that you can have a good track record with credit. Getting rid of a long term credit card effectively wipes out a chunk of your credit history and reduces your credit score as a result. Another factor is the effect on your credit limits.

Canceling a credit card reduces your overall credit limit, which means that you need to reduce the balances across your credit cards to stay within the recommended 30 per cent guideline. If you cancel the credit card(s) but do not reduce your overall balance, you will probably be exceeding 30 per cent of your new available credit limit and this will impact on your credit score as it makes you look like a riskier proposition.
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