One may think the best credit rating is gained by someone who owes nothing and lives credit-free. However, the best loan candidates are people who have what is known as “good debt” and who continue to pay that debt off in a timely fashion. Mortgages, home equity loans, auto loans and student loans are all considered “good debt.” Your investment is likely to increase in value over time and you’ll encounter lower interest rates with these debts and you will have the opportunity to show your ability to be a reliable borrower over time. “Bad debt” is considered to be something that costs more than you can afford to purchase on a credit card. Understanding the difference between these two things is the first step in formulating a responsible plan to create clear credit.

Improving credit scores involves avoiding many things. In the order of importance, they are late payments, high credit card balances, closing credit card accounts and having too many in-store charge cards. Late payments carry 35% of the weight in terms of your credit score, so do not take them lightly, even if it’s just a store charge card, a cell phone bill or a rent payment. Your credit score can drop by as little as 20 points or more than 100 points, depending on how often you are late and how many accounts you’re late on, as well as whether you are 30, 60, 90, or more than 120 days late. Secondly, your credit usage should be no more than 40% of what is offered to you.

If your credit line is $1,000, then you should owe no more than $400, and that goes for all lines of credit you have open. If you have any maxed out cards, then pay them down until you hit the 40% mark! Some people think they should close out their accounts to “do the right thing” or “prevent overspending,” although this will decrease your overall credit offering and will reflect negatively on you. Instead, work on paying those balances down and once you’re finished, aim to purchase one thing a year on those cards to keep them active, and pay them off right away. Lastly, opening and closing store charge cards just to get that 10-15% initial discount is a signal of irresponsible credit behavior and will not result in high scores for your credit.

More On: Fast Track To Good Credit Rating

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This entry was posted on Monday, September 29th, 2008 at 5:33 pm and is filed under Financial Services. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.