Credit Scores and How to Improve Them

MAY 25, 2005 -- If you've gone out to purchase a new car, but when you tried to finance it, you couldn't get one of those super low interest rates, chances are your credit score was too low.

Your credit score is a fairly accurate prediction on how likely you are to pay your bills. Credit scores are used extensively and if you've applied for a mortgage, tried to get a credit card or just buy car insurance, the rate you received was directly related to your credit score. The higher that number is, the better you look to lenders.

If you've rented an apartment, bought cell phone service or applied for a job that involved handling money, there is a good chance your score was pulled.

Obviously, it's important to have a good credit score. The difference in the interest rates offered to a person with a score of 520 and a person with a score of 720 is almost four percentage points. It may not sound like much, but over the course of time, a $100,000 home financed for thirty years will mean more than $85,000 extra in interest charges. The difference in monthly payments alone would be $250.

The bottom line, people with the highest scores get the lowest interest rates, which can save you a ton on money.

Several factors go into making up your credit score. More than one third of it is based on your past payment history. Almost another third is based on your current credit capacity. Fifteen percent depends on how long you have had a credit history.

Other factors include how much credit you have accumulated in the past 12 to 18 months and the last ten percent depends on your current mix of credit.

For example, installment loans can help increase your credit score while revolving loans can actually lower it.

Chances are your credit problems probably didn't happen overnight, so it's going to take some time to fix, but there are some things you can do.

Pay down credit cards, but don't close the credit card account because your credit capacity will decrease. Continue to make your payments on-time. Slow down on opening new accounts and if possible move revolving debts, like credit cards to installment loans.

Stick to your plan to improve your credit score because the higher the number, the better you look to lenders when buying your next car or big ticket item.

Reported by Bob Townsend