Today, many lenders and other financial institutions have been tightening up their availability to credit and only offering loaned funds to those who have higher credit scores. While this is due in large part to avoiding future unpaid loans, it has raised the awareness of individuals to more frequently monitor their credit scores and to take the necessary actions to get and keep these scores at higher levels.
For those who are currently striving to raise their credit score, it is important to get good advice for doing so. Otherwise, moving forward with certain activities – even though they may appear to make sense – could end up backfiring in the long run and actually cause your overall score to drop.
Stop Using All Forms of Credit
One of the worst things that you can do in terms of raising your credit score is to stop using credit altogether. This is because – although you will have no debt – you will also have no credit at all, and this actually counts as a negative towards your overall credit score. And, while it is important to be able to pay off loans that are obtained, it is also imperative to have some form of repayment with which your credit score can be based upon.
Cancel Unused Credit Cards
Although it may appear that cancelling unused credit cards would raise an individual’s credit score, it is actually the opposite that is true. This is because one of the key factors in determining your score is the total amount of credit that you have available to you in relation to the amount that is being used.
As an example, if an individual has a total of $50,000 in available credit, and they have a $5,000 balance being used, the person has a total credit utilization of 10 percent. ($50,000 divided by $5,000 = 10).
However, if this same individual were to cancel a credit card with a $20,000 line of credit – even if that card had not been used for quite some time – it would lower their total amount of available credit to $30,000. It would also drastically increase the person’s percentage of total credit utilization to nearly 17 percent. The higher percentage of credit utilization would thus count negatively towards the individual’s overall credit score.
Apply for New Credit Cards in Order to Raise Your Total Amount of Available Credit
While having a higher amount of available credit can work positively towards a person’s credit score, applying for too much credit – including having too many credit cards – can be considered a negative. This is especially true if the individual has most of their available credit already in use and is primarily applying for new credit cards in order to take on even more amounts of debt.
Apply for Large Lines of Business Credit
Some “experts” may encourage individuals to open up credit cards in the name of a business. In this manner, these individuals could obtain additional lines of credit without harming their personal credit score.
This, however, is not good advice. What many people do not realize is that even with a business account, oftentimes individuals must offer a “personal guarantee” on the repayment of borrowed business funds.
What this means is that in many cases, even the funds that are borrowed under a business name are still connected to the individual’s Social Security number – and thus can be correlated with that person’s personal credit score.
File for Bankruptcy in Order to “Start Over”
There are a myriad of advertisements geared towards those who are in financial trouble. Many of these ads state that individuals may have a chance to “start over” financially by filing for bankruptcy. While in certain cases this may be true, most often these ads are really just a way for the advertiser to collect a fee from individuals who are already in dire financial straits.
Unfortunately, regardless of the surrounding circumstances, the filing of bankruptcy will cause an individual’s credit score to drop dramatically. In addition, bankruptcy creates a blemish that can often remain on a person’s credit report for between 7 and 10 years – causing great hardship in obtaining mortgages, auto loans, credit cards, and even future employment.
The Bottom Line
No matter what the state of an individual’s credit score, it is essential to obtain the correct advice when seeking to raise that score. Because credit scores are oftentimes reviewed by financial institutions as well as potential employers, landlords, and utility companies, it is imperative to understand what will – and will not – create positive movements in your overall credit score.
George Gallagher is a contributor to many of his favorite finance blogs. He also helped build the web’s best student loan consolidation calculator.