In many areas of my practice, whether commercial acquisitions or sales, private money placement or short sales; I am often asked about credit issues. This is because a credit score affects whether a lender will extend you credit and the terms and rate that will apply to the borrowed funds.
Credit bureaus use proprietary models to consider a variety of factors and assign a point value to certain factors to determine your credit score. The types of factors typically considered are bill paying history, account number and type, whether payments are made by the date due, collection matters, outstanding debt obligation and the age of your existing accounts.
There following are actions you can take to improve your credit score:
- Pay your bills on time. Payment history can be a huge factor in arriving at your credit score. A history of late payments, referrals to collection agencies or bankruptcies will have a negative effect on your credit score.
- Make sure your accounts are not charged to their limits. If the amount of debt that you carry is close to the credit limits you have available, you will look less creditworthy to potential creditors.
- Establish a long credit history. Credit scoring systems track your credit history. An insufficient credit history may have a negative impact on your credit score. However, factors such as timely payments and low balances can offset the lack of credit history. Many credit advisors also recommend that you keep your oldest credit card to establish the long positive history that credit agencies find attractive.
- Be strategic when applying for new credit. Credit rating agencies will examine the inquiries on your credit report. Where there are too may new account applications there will be an overall lowering of your credit score. Be cautious when presented with store issued credit cards, the ten percent you save at the register may cost you thousands when you try to purchase a home.
- Limit the number and type of credit accounts that you maintain. While it is a positive to have established credit accounts, a large number of accounts will act to reduce your score. It is also important to note that in some instances loans from finance companies will have a negative effect on your credit score.
It takes time and discipline to improve your credit score but the financial rewards make it worth the effort. All it takes to improve your credit score under most models is to pay your bills on time, pay down outstanding balances and avoid incurring new debt.