Improve Your Credit Profile To Obtain Better Credit Deals
When you apply for credit, it is understood that the lender will check your credit report. The information contained in your credit report helps lenders decide how much credit and what interest rate you are eligible for. The more stable your credit history, the more likely you will qualify for the best credit deals.
What They Look For:
Pay Your Bills On Time
Creditors always check to see that the prospective borrower is worth the risk. So pay your bills on time! This demonstrates that you are what they are looking for.
Good credit does not necessarily mean perfect credit. “Good” credit can include a few minor problems, such as:
- Up to two credit card payments 30 days late.
- One installment payment, such as an auto or student loan payment, 30 days late.
You should not have any payments more than 60 days late and there should be no outstanding public record debts such as judgments or liens.
Keep Your Debt Load Reasonable
One factor any creditor must analyze before extending credit is the total debt of the person applying. If a large portion of your income each month is already dedicated to paying off other debt, the lender will have doubts you will be able to pay back an additional loan.
Financial experts advise that non-mortgage debt payments should not exceed 10-15% of your take home pay each month. If your debts are currently too high, consider alleviating some before applying for new credit.
A note about cosigning: If you cosign somebody else’s loan, the outstanding amount is considered your debt, even if the individual for whom you cosigned pays all the bills. Because cosigning means you have contracted to pay back the loan if the other party does not, it is considered one of your liabilities. Therefore, think carefully about cosigning, even if it is for someone you know will pay the debt; it does affect your credit.
Avoid Unnecessary Inquiries
When you permit a creditor, employer, or other business to check your credit report, an “inquiry” is added to the report itself. This is a note stating that someone has checked your credit. (Checking your own credit report does not count.) An inquiry usually is visible on the credit report for up to two years.
A lender considering you for a loan will look at the number of inquiries recorded there and the time they occurred. A large number of inquiries taking place over a short period of time may mean that you:
- Applied for a large amount of credit due to financial difficulty.
- Overextended yourself by taking on more debt that you can really repay.
So, it is always a good idea to minimize inquiries into your credit report. If you are looking for mortgages, do not authorize every lender you consider to run a credit check. You may have to settle for slightly more approximate estimates on what the lenders can offer you, since they cannot verify your credit history. That is still better than shopping around only to find that the lender of your choice now considers you risky and wants to charge you more money.
Eliminate Excess Unused Credit
Just as a high number of inquiries suggests you may be overextending yourself, a surplus of available credit means that you are capable of overextending yourself in the future, even though you have not done so before.
Although some my believe that having many credit cards with high limits is a sign of good credit, too much of this can make them appear as a poor credit risk.
The lender needs to be assured that you will continue to be able to repay your debt in the future. But if thousands of dollars of unused credit are available, it is possible that you may spend it all the month after your loan closes and suddenly have more debt than you can pay off.
To not concern the lender, it is recommended that you close unused credit accounts before applying for a large loan, and/or consider reducing your credit limits. If you do that, ask the creditors to record that the account was closed or changed at the consumers’ request. This will stop anyone from thinking that the bank closed the account because you had bad payment habits.
