These four tips will help you maintain a strong credit rating. These are the very basic, and most important tips for keeping your credit rating in good shape going forward.

1) Know your financial worth. It’s impossible to plan and stay on a budget if you don’t know how much money you have to work with. Know the source of all your income, and have a tax planning strategy in place.

2) Get a tight grip on your expenses. Analyze your spending habits, and keep track of where your money goes. No more impulse shopping! Include savings and / or 401(k) as an expense within your budget to help you save for retirement.

3) Paying off high interest debt first. Think about consolidating high interest loans into one low interest loan or personal line of credit. Both usually carry lower interest rates, and have one monthly payment to worry about. Try calling a low interest credit card company to transfer the balance of all your other credit cards to them to reduce interest costs. Sometimes card companies will offer lower interest rates on the portion you transfer in to them to compete for this business.

4) Don’t keep your credit cards maxed to their limits. While it may be tempting to pay only the minimum payment each month on your credit card, try paying off the entire balance to avoid interest charges. Keep a separate monthly list of who you pay interest to and how much, and see how quickly your concern grows to pay it off.

How Your Credit File is Rated

Here are the rating codes typically found in a credit file. The credit grantor (bank, department store, or oil company) issues the rating and not the credit bureaus. These are the credit bureau codes that define your relationship with each creditor you have on your file.

R0 – Too new to rate; approved but not used.

R1 – Pays within 30 days of billing; or pays back as agreed.

R2 – Pays in more than 30 days, but not more than 60 days; or is one payment past-due.

R3 – Pays in more than 60 days but not more than 90; or two payments past-due.

R4 – Pays in more than 90 days but not more than 120, or is three payments past-due.

R5 – Account is at least 120 days overdue, but is not yet rated an R9

R6 – (This rating has not been assigned)

R7 – Making regular payments under a consolidation order or similar arrangement.

R8 – Repossession

R9 – Bad debt account placed for collection.

There is more information on your credit report then repayment history alone: collection items you paid or neglected; every time you change your address; when your credit report is assessed by a lending institution, that company’s name is always logged.

The more companies that access your credit report in the same period of time actually hurts your chances of getting approved. Don’t become known as a “credit seeker”. As you shop at each bank for the best loan rates, each preform a “data pull” and review their copy of your credit report. They also know all the bank’s you apply to, and are not able to determine if you’re shopping for rates, or desperately need money, and are applying everywhere. This is known as “shot gunning” for a loan and is not a good practice.

As your credit agency report builds and updates with new information, a special model (Fair Isaac or FICO) takes all the available data when requested and creates a score. Every time you move, apply for credit, miss payments, etc., your score may be affected. The poorer the score, the more risk is seen by financial institutions when lending to you so the more you shop for credit, the less chance of getting approved. An ugly Catch-22 right?

Some lenders electronic application processes have built in filters that reference the bureaus’ score for you in the application process, thus directly influencing the success of your application, though the score is not the sole factor influencing the success of your application.

A creditor reviewing your credit report, after seeing a few credit inquiries listed around the same time, may wonder why you were never approved. Perhaps this lender wonders,  “were they missing something that the others didn’t”. As well, there is the risk that a few loans could be granted all at the same time in isolation from each other. That is to say that the other creditors were unaware of the other applications status (approved / declined) and you could very well be leveraged beyond your limits if all those loans were approved. Some people do this, and not only hurt themselves, as they can’t repay their commitments, that their credit score and file will now be compromised due to their own poor judgment as a borrower the next time they need financing.

As discussed before in this series, a credit card provider that regularly increases your limits ties up your borrowing power. Sometimes on your credit report, your credit card limit is not reported – only your highest balance. This means that if you have a card approved maximum limit of $10,000 and have never put more than $4000 on it, the trade line could actually be read as having a $4000 credit card. If you only use $4000 on your card, then reduce the limit to be the same and formally free up your borrowing power for future needs.

Continued in the Carol’s Borrowing Series Category of Clf.