How you manage loans impacts your FICO score more than any other factor in your credit report. It's a fact, you are scored heavily on the kinds of loans you have, how many months or years you have had those loans, how much you owe, and your repayment history, are key clues that credit bureaus use to arrive at your credit score. If you can wisely manage your loans, you will add points to your credit score quickly. Here are 4 key tips...
1. When interest rates drop you should try to refinance your high interest loans.
If you have high interest rate loans, especially on big ticket items like a motor vehicle or home mortgage and interest rates drop two points or more in the market, investigate refinancing some or all these loans. This is especially true if your credit score improves to above 700, even above 750 would be better. But, be wise about how you carry out this tactic.
First, shop loan sources other than the creditor that has your loan now. This way you may force your current lender to compete for your continued business by offering a lower interest rate. At the same time, do this only with those lenders who are obviously only interested in making money on you. Stick with lenders with whom you have a good long-term relationship but advise them that you are looking for a lower rate on your loan.
When shopping for credit give prospective creditors only your credit score, never give your Social Security number, for them to come up with a quote. Giving your S.S. number results in inquiries on your credit report which can damage your score. When they use only your score, no inquiries are recorded.
When seeking loans, you want a lower interest rate or better repayment terms or both. By getting a lower interest rate you will save hundreds, perhaps thousands, of dollars in interest. At the very least, getting more favorable monthly repayment terms that you can comfortably afford, will enhance your loan repayment history and automatically improve your score.
Refinancing is ideal for someone who is living from pay-to-pay and having a tough time making their monthly bills and who has been getting late notices or collections recorded in their credit history. It's also a good idea for someone who has been paying bills on time with no recent negatives in their credit history and who has a good credit score. They will have an easier time refinancing for a better interest rate and more favorable repayment terms.
2. This is not my favorite solution but, if you must, there are loans available for folks with a poor credit history.
If your credit score is really poor and you need a loan, you should look into services that provide loans to people with poor credit scores. But, be very careful you do not go even deeper into interest rate debt. There are legitimate lenders who know that some folks with poor credit scores will still make their payments on time if given a second chance and they are willing to speak with anyone that other lenders have denied.
If you go this route, you most certainly will be faced with paying higher interest rates and may need some sort of collateral to back the loan but, going with a loan from a bad credit lender is one way to ensure that your low credit score will not be used to disqualify you.
Keep in mind that there is still a chance that you can try to refinance your higher interest loan in the future if interest rates go lower or your credit score is higher. In the meantime, your focus should be to consistently improve your credit history to get your score higher so you qualify for the best interest rates and repayment terms in the future.
3. Know the right answers before you talk to prospective lenders.
If a lender asks - "What's your credit score?" - you need to know exactly what you score is.
If a lender asks - "What's your Social Security number?" you need to say - "My credit score is... use that please. I would rather not have an inquiry on my credit history."
Knowing your credit score in advance is extremely important because it gives you an edge against dishonest lenders who will try to con you into much higher interest rate than your score recommends. If you give them your S.S. number without knowing your credit score in advance, they may say your credit score is lower than it really is and quote you a higher interest rate based on the phony score.
The best advice is: Know your score in advance and never give your Social Security number until you are in the final stages of signing for the loan.
4. A little lender face-time may be called for.
Nothing beats face-to-face in selling and it's the same when it comes to getting a loan. Applying for loans on the telephone or on-line should be your last resort if you have poor credit. Your first option is to go to the offices of your local lenders and ask to speak to a loan officer face-to-face. This tactic can make a big difference between getting the loan or being rejected.
When you meet face-to-face, the prospective lender sees you as a fellow human being not just a cold credit score and lifeless credit history. You will have the opportunity to sell yourself as a good credit risk.
Have a plan of action ready in advance. You can explain that you have had some difficult times in the past but now you are more knowledgeable about credit and would like a chance to prove yourself. Explain how you intend to pay back the loan and what you are doing with your finances overall to clean up your credit.
During this process, be confident. Be prepared. Do not beg. You want to appear as someone who finally has their personal finances together and you just need someone to give you a chance.
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