Lifetime of Credit History Information
A common mistake that people make when analyzing their credit history is either assuming that information stays on their reports forever or, conversely, that it is taken off quickly. Different kinds of financial information have different lifetimes on your credit report. Serious financial delinquencies, like bankruptcies for example, stay on your record for as long as ten years. Minor financial misdemeanors like missed or late payments, however, stay on your record for at most seven years. Inquiries have a lifetime of two years on your comprehensive credit history but your credit score typically only considers inquiries made in the last year only. As a general rule of thumb, however, negative information lowers your credit score very easily and is hard to reverse. The best approach to maintaining and improving your credit score is to follow a strategy of prevention rather than treatment.
Lower Your Credit Utilization
Credit utilization, or debt limit, is the amount of credit you have taken against the amount you have available to you. For example, if your credit card allows you spend up to $5,000 on credit and you spend $4999, you have high credit utilization. This essentially means that you are highly dependent on credit for your daily needs and hence are unlikely to be able to take on a new loan. Note that even if you are extremely prompt in your payments and have never made a late payment or defaulted on a loan, financial institutions will still look at your credit utilization to ascertain your financial health. The first step you must take to improve your credit score is to lower your credit utilization. As a rule of thumb, spend only 30% of your credit limit and always make your payments on time.
Limit Your Sources of Credit
A common strategy that people take when they are burdened with debt is to shift it between credit cards. You owe a certain amount of money on a credit card from a particular company. As the payment date approaches, you take money on credit from another card and pay off the first. Rotating credit never shows up favorably on your credit scores. The best thing to do is just pay off existing your debt on one card without resorting to more debt, start afresh and see you credit score rise substantially. The only exception to this rule is if you are financially healthy already. One criterion of the FICO score is how varied your sources of credit are. If you have taken credit from varied sources and successfully paid back the amount you were lent, creditors will assume that you know how to handle money. For most of the population, however, stick to the tried and tested rule of limiting your sources of credit.
It’s Never Too Late
People often give up when they see their credit scores plummeting and this almost knee-jerk reaction affects their scores even more. Always remember that credit histories are not written in stone and there is a lot you can do to improve them. A particularly low score may take time to improve but be aware that such an improvement is possible only if you put your mind to it and observe some amount of discipline in financial matters. For example, if you have missed payments and this has lowered your score substantially, start making payments on time and keep this up for a year. Your credit score will drastically improve. Another thing to remember is that although small things like missed payments stay on your credit history for seven years, the longer away they were, the less they are accounted for in the credit scoring process. It is never too late to clean up your finances. The earlier you realize this and the earlier your start, the sooner you can reap the benefits of a good credit score.