by Frances Stanford

Created on: April 22, 2010

Your credit score is the single most important record of information that exists about your financial situation. All lenders will check your credit score when you apply for a loan or a credit card. If it is not satisfactory they will either reject your application or approve it at a high rate of interest because of the risk you pose for repayment.

A credit record consists of all your accounts – those that are still active and those which you have repaid in full. The manner in which you make your payments – meeting your monthly financial obligations – makes up the highest percentage of your score. It accounts for 35% of your credit score so if you are not on top of things and make regular payments on your accounts for the minimum amount due and by the due date on the statement, this shows up as a negative item. Thus, you payment history can have a detrimental effect on your credit score.

Obtain a copy of your credit score and scrutinize it to see where the problem lies in your low credit score. If there is a record of missed or late payments, there is a simple way to improve your credit score – start making your payments regularly. It would even be better for you if you pay a little extra on each one to bring down the balances. If you have missed any payments, catch up on these as soon as possible.

The amount of debt that you have makes up another large portion of your credit score – 30%. Having a lot of debt in relation to your income will lower your score. It is not easy to reduce your debt, but it can be done. Start by choosing the accounts that have the highest rates of interest and make higher payments each month so that the payment does more than just cover the interest charged for the month. If at all possible, try to pay the minimum payment, plus the interest. You will be surprised to see how quickly your outstanding balance starts to decrease.

At the same time, you do have to continue making payments on all your other accounts. By choosing one that you are going to try to pay off in full, you will be doing yourself a great favour because as the balance goes down lenders will see that you do have monies available on the account.

When you have a revolving account paid off in full, you could be doing yourself and your credit score a great injustice by closing the account. It is best to keep it open and use it once in a while. Pay off the balance in full at the end of the month if you wish, but contrary to popular opinion paying the full balance on accounts each month does not benefit your credit score. It is best to divide it into two monthly payments, even if this means you have to pay interest. This shows up as a positive item on your credit report and by making the payments you will be working towards improving your credit score.

The more times you apply for credit the lower your score will be. Every time you make an application for a loan or a credit card, this shows up on your credit report. Too many applications in a short period of time also have an adverse effect on your score, even if you do have the monies available to make the payments.

By working hard and paying attention to your finances and monthly payments, you can improve your credit score. However, you should not expect to see an improvement overnight. It usually takes about six months to see any change in this score.

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