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Turned Down For a Loan? Improve Your Loan-ability!

Two years ago, someone with a 600 (poor) credit score could qualify for a mortgage or car loan. Now, reputable lenders will not even consider lending to someone with a score below 700. There is good news though, there are ways you can improve your “loan-ability” in the eyes of lenders and possibly get that home or auto loan you have been dreaming about.

First, you have to know that the condition of your credit impacts many areas of our lives now. If you want to rent a place to live, qualify for certain jobs, pay less for auto insurance or pay a smaller down payment on things like utilities and cell phones, you must have good credit.

The popular credit scoring model from FICO uses the following model to show people how information in their credit report impacts their credit scores. We’ll start with the items that make the biggest impact and work our way down to the smallest.

Payments – if you are not current, get current. The most damaging items on credit reports are late payments, items in collections, or items that have ended up in court. Manage your bills carefully.

  • Don’t skip payments – if you are juggling or struggling with bills, contact your creditors and ask to make payment arrangements.
  • Pay your bills on time.
  • Try to avoid bankruptcy. Declaring bankruptcy is one of the worst things you can do for your credit score.

Debt – if you have it, get rid of it.

  • If you have credit cards and carry a balance on them, pay those balances down. Carrying a balance that is more than 30% of your available credit limit may have a negative impact on your score.
  • Review your credit report for any errors and correct mistakes that are not accurate (but are still hurting your current score).
  • Manage your bills carefully.  Monitor your checking account carefully to avoid bouncing a check or worse – having it returned.
  • Don’t skip payments – if you are juggling or struggling, contact your creditors to see if some accommodation can be arranged.
  • Pay off debt rather than moving it around. Avoid balance transfers.

Length of history matters – Keep accounts that you have had for a long time!

  • If you have an old credit account that you’ve always paid on time, keep the account. Closing the account may negatively impact your amount of available credit and prevent the positive history from helping your score.

Mix of credit and new credit –

  • It is good to show you can handle different types of accounts. Having a credit card, auto loan, student loan, etc. looks better than having only credit cards on your credit report.
  • Refrain from opening a lot of new accounts over a short period of time, especially if you have very little credit history.
  • Don’t open any credit lines you probably won’t use. For example, don’t open store credit cards just to get the initial 10 percent discount.

The bottom line – to have a good credit score, you need to:

  • Make payments on all bills and debts on time.
  • Use less than 30% of your available credit limit on credit cards.
  • Keep open 1 or 2 credit accounts, use them responsibly, and again, make your payments on time.
  • Try to use your credit cards less – even better, pay them off every month. Too much credit is just as detrimental to your credit report as not enough.
  • Get help from a credit counselor if you need it!

Keep in mind; negative items have a lot more power over your credit score than positive items. A little effort will save you a lot of money in the long run!

Published Nov 23, 2009.