Question

Stacey is single and took her first ever job last year. She has been diligently saving and has $10,000 in a regular savings account. She has another account with enough money to manage the next three months of expenses.

Stacey is interested in buying a new car. The car dealer told her that her credit score was not high enough to be eligible for the 0% finance offer and she simply cannot understand why. She pays all of her bills on time. Stacey knows you took a personal finance class and asks you 1) How can I improve my credit score and 2) What else can I do to improve my overall financial situation?

Answer 1

Credit card scoring takes into account the payment history of interest and principal on loans and credit cards, amount of revolving credit used regularly, number of accounts opened, and the types of accounts you have and how frequently you apply for new credit.

To keep a track on your scores, start checking your credit scores online. This will help you to get information regarding factors affecting your scores. These risk factors will let you understand the changes you can make to start improving your scores.

The credit score reflects the credit payment patterns over time, having emphasis on recent information. Focusing on following action points will help you improving your credit scores.

1. Payment of Bills on time: Payment performance is considered as good indicator of past as well as future performance.Late payment or late settling of an account with lesser amount can negatively affect credit scores. All bills should be paid on time and not just credit card bills or any loans you may have.

2. Pay off Debt & Keep Credit Balances Low: The credit utilization ratio is an important figure in the credit score calculations, which is calculated by adding all your credit balances at any given time and dividing that amount by your total credit limit. Example, if you typically charge about $5,000 each month and your total credit limit across all your cards is $25,000, then your utilization ratio is 20%.

· Paying off debt and keeping credit balances low.

· Becoming an authorized user for some another person's account (as long as they use credit in a responsible manner)

3. Apply and Open New Credit Accounts Only when Needed: Don't open credit accounts just for having better credit mix, because it won't improve your credit score as you project. Unnecessary credit may harm your credit score in multiple ways, from giving too many hard inquiries on your credit report to instigating you to over-spend and accumulate credit and debt.

4. Don't Close Unused Credit Cards: Maintain unused credit cards as open as long as they're not costing you money in any kind of annual fees. It is a good strategy, because closing an account increases your credit utilization ratio. Since owing the same amount but having fewer open accounts lowers your credit scores.

5. Don't Apply For Needless New Credit, Results in Multiple Inquiries:  Having a new credit card increases your overall credit limit, but the act of applying for credit creates a hard inquiry over your credit report. Inquiries negatively impacts your credit score. Hard inquiries remains on your credit report for two years.

Further, to improve the overall financial situation, the focus shall be more on earning rather than savings, because greater earnings can have savings also, but savings do not make the earnings flow.

So focus on earnings should be made from investment in diversified and calculated risk based assets such as shares, debentures, bonds, stocks etc.