Improving Credit Score - Assignment Example

Learning Objective: to find different ways of improving someone’s credit score

In each of the following cases, find some ways to help this person improve their credit score.

1. Sherman is headed off to college this year. He took an extra year in high school in order to play sports a little bit longer. This gamble has paid off, and he is now headed off to college with a partial baseball scholarship. He knows that sometime soon he will have to replace the old pickup truck that his uncle gave him in high school, but he certainly does not anticipate being able to buy a new car with cash until well after college. He has never used a credit card before. What might he do to increase his credit score in anticipation of buying a car in the next several years?

Yes. I agree that acquiring a small credit card and using it to make small purchases during his time at the college can successfully help to build his credit score. Besides, paying his small bills on time while in college and making all utility payments such as cell phone payments in time can also improve his credit score. Sherman should also pay off debts and keep low balances on credit cards. However, Sherman should never close his credit card even when it is not used in making his utility payments.

2. The Brown family wants to refinance their house, but before they do this they want to see if there is any way to improve their credit score to lower their rate. They have a savings of $5,000. Their total monthly income is around $3,000 after taxes. Mr. Brown is thinking about quitting his job in order to finish his bachelor’s degree. This will reduce their monthly income substantially. They also have several department store credit cards that have an outstanding balance of $600. What are some things they could do to increase their credit score?

It is not a good idea in case he is thinking of going back to school. It can still happen while he is at work so that the management of the school can give him lesser working hours or other ways of running his schedule at the school. Through running such schedules, he can have a source of income to help him pay his utility bills using the credit card which will improve his credit score. He can do this alongside undertaking his bachelor’s degree also to enable him to finance their house

3. Shannon is looking to buy her first house. Since she knows that her credit score could have a big impact, she wants to improve hers as much as possible. She has a number of credit cards that she pays regularly. She couldn’t pay them off right now, but she just got an offer in the mail for a new credit card that has no interest or fees on balance transfers. This change would dramatically lower her monthly payments. Since she has an erratic work schedule, she has also had trouble paying her bills on time. What can she do to improve her credit score?

It would be a great idea to acquire a credit card that charges no interest rates or no fees on the balances. This is because it would lower her monthly payments. However, this would result in a transfer of liability into the new credit card that has no introductory charges. First, Shannon should pay off the balances in her previous credit cards to have an improved credit score then acquire the new credit card. If she wants to improve her credit score, she should immediately stop using the other cards and consistently pay her utility bills using the new card. Additionally, she should try at all times to maintain the minimum balance in her bank account and to ensure that she automatically clears her utility bills before they are due. She can then start making savings on the new credit card. By saving on the card and consistently using the card, she will dramatically improve her credit score and will ultimately purchase her first house.

4. Most adverse events (like late payments or collections) can only stay on your credit history (and therefore affect your credit score) for seven years. Answer the following questions: Do you think it is reasonable for there to be a limit on the length of your credit history? Why or why not? If you could change the number of years what would you recommend?

First, I feel like seven years is quite a long duration to keep a negative credit history of a customer or for a collection of payment to stay on the credit card. This is because of the various financial challenges that a credit cardholder could have undergone or is still undergoing. I think three to four years would be a better duration that should be used by companies when advancing credit facilities to people. I think the creditworthiness of a person should never be viewed for a period extending beyond the four years. This is because lending and payment histories may change over time when an individual gets a well-paying job or has a changed attitude towards savings.

5. How would you expect your credit score to be affected if you are a co-signer on another person’s loan?

If I am a co-signer in another person's loan, my credit score would be negatively affected if such a borrower isn't making regular payments on time as agreed. However, if they are making such payments, my credit score wouldn't be affected. With missing payments by the individual borrower, my credit score would be drastically affected.

6. For each of the following, explain whether this action will increase or decrease your credit score and why:

a. Paying off some of your outstanding debt

This will raise my credit score since I am successfully sorting out my debts

b. Taking out a new credit card

This can have a negative and positive impact on my credit score, depending on whether I have been making my previous debt payments on time. However, with negative payment history, taking a new credit card wouldn't change my credit score. Although it may be negative at the initial stages, consistently using the card to make payments and timely payments will eventually increase my credit score

c. Setting up automatic bill pay

Automatic payments of bills are beneficial, especially when I could quickly forget about paying my bills when they are due. This will help increase my credit score. However, it will have no change in my credit score if I could remember and promptly pay the bills.

d. Buying a house

Purchasing a house on credit will decrease my credit score since it will require regular payments to be made. However, If I keep up with making the payments in time, my credit score will eventually increase

e. Checking your full credit history online

Although it is an excellent decision to make to ensure that I have no pending bills to pay, checking alone has no impact on my credit score

f. Increasing your maximum credit available

Adding more credit will reduce my credit score. This is because I will have more payments to make.

BONUS: Suppose you are a bank in a country where no one has a credit score. What could you use to determine someone’s creditworthiness?

In developing economies without an established credit score, I would access the creditworthiness of my clients by inspecting the estates where they live and the types of assets that they own. Those customers with more valuable assets would qualify for higher loans, unlike those with no valuable assets and those who live in cheaper houses. I would also evaluate the existing bills that such customers have to make regular payments for. Clients with more bills will qualify for a lower loan, while those with less or no existing loans will qualify for a higher loan. The number of dependents and the size of the family is another important criteria that I can use to determine the amount of credit to advance.