How important is your FICO score? If you’re buying a house or car, getting insurance, or even applying for a job, it can be critical. Your FICO score, also known as your credit score, helps lenders determine what interest rate to give you, and many insurers use it to determine your premiums. A low score can even prevent you from renting the apartment you want or, worse yet, make you ineligible for certain jobs.
Surprisingly, with so much riding on this number, very few people understand how the FICO score is calculated, what the score means, or what they can do to repair their scores.
1. EVALUATE YOUR SCORE. THE POINT SYSTEM USED TECHNICALLY RANGES FROM
0 – 999, BUT ALL OR NEARLY ALL ACTUAL SCORES FALL BETWEEN 330 AND 850.
- 330 – 619 Poor credit. In banker terminology a person with a score in this range is considered a “Credit Leper.”
- 620 – 659 Sub-prime financing will be available to you.
- 660 – 720 Prime financing will be available to you.
- 721 – 750 Prime interest rate may be available to you. That is, you may be able to get interest rates on loans that are even lower than the prime rate.
- 751+ Excellent credit. May enable you to get even lower prime – interest rates depending on the credit type you’re utilizing.
2. UNDERSTAND WHAT AFFECTS YOUR CREDIT REPORT. THE EXACT CALCULATION OF THE FICO SCORE IS KEPT SECRET AS PROPRIETARY INFORMATION, BUT THERE ARE SOME GENERAL GUIDELINES THAT CAN APPLY.
- 35% of your credit score is based on your consistent payment history and only includes payments later than 30 days past due.
- 30% is based on the percentage of your credit capacity being used; i.e., the ratio of current credit debt in comparison to total available credit or revolving credit. If you carry very low balances on credit cards, your score will be higher than if all your cards are nearly maxed out.
- 15% of your score is determined by the length of your credit history.
- 10% is based on the types of credit you have; i.e., installments (car payments, student loans, or a mortgage), revolving (credit cards or lines of credit), and consumer finance (bank loans and the equivalent).
- 10% is based on recent searches for credit and/or the amount of credit you’ve recently obtained. Every time you apply for credit it affects your score negatively.
YOUR CREDIT SCORE
7 STEPS THAT CAN HELP YOU INCREASE
- Dispute Errors and Inaccuracies
According to recent studies as many as 80% of consumer credit files contain errors. That means that 80 out of every 100 Americans have inaccuracies on their credit report. Chances are you might be 1 of those 80. Inaccuracies, especially ones that are harmful to your credit scores, can lead to higher interest rates on loans and credit cards or denials for new credit. After you’ve obtained a copy of your credit reports review them carefully to identify any items that are negatively impacting your credit score and highlight everything you believe to be incorrect, inaccurate, errors or obsolete, These could be inaccurate or outdated accounts, unauthorized inquiries, collection that are not yours, duplicate derogatory accounts and outdated or unknown public records and accounts listed as “settled,” “paid derogatory”, “paid charge-off’” or anything other than “current” or “paid as agreed” if you had in fact paid on time and in full.
- Make Payments on Time
The single most important thing you can do to keep your score high, or improve upon your score is to make your payments on time. Payment history is the largest factor used to determine your credit score. Payments that are 30 days or more past due will show up on your credit report and negatively impact your score. These negative items generally stay on your report for seven (7) years.
- Make Sure Proper Credit lines are Posted on Your Credit Reports
Often, in an effort to make you less desirable to their competitors, some creditors will not post your proper credit line. Showing less available credit can negatively impact your credit score. If you see this happening on your credit report, you have the right to complain and bring this to their attention. If you have bankruptcies that should be showing a zero balance make sure to they show a zero balance! Very often the creditor will not report a “bankruptcy charge off as a zero balance until it’s been disputed.
- Pay Down Debt and Don’t Max Out your Credit Cards.
The second largest factor impacting your credit score is how much you owe. This accounts for 30% of your score. The more you owe, the lower your score will be. Someone who owes $30,000 is riskier than someone who owes only $1000, all else being equal. So a great way to increase your credit score is to pay down as much debt as you can. Another factor in the credit score formula is whether you use most or all of the available credit on any given account. The theory is that if you max out an account, it may reflect some financial difficulties that could increase your risk of default.
- Keep Old Positive Accounts Open
Length of credit history is another important credit score factor, so it can be to your advantage to keep open older accounts that are in good standing. While it is important to keep the total number of open accounts manageable, it may be more hurtful to your score to close an old account than to keep it open even though it increases the number of open accounts.
- Keep Revolving Accounts Open
It is very helpful that you maintain a variety of credit accounts. If you do not have four active credit cards, you might want to open some. If you have poor credit and are not approved for a typical credit card, you might want to set up a “secured credit card” account. A secured credit card requires you to make a deposit that is equal to or more than your limit. This guarantees the bank that you will repay the loan and is an excellent way to establish credit.
- Use Caution When Applying for New Credit.
Every time you fill out a form and apply for a credit card, line of credit, or other loan, an inquiry is made to your credit report. While new credit is the least important factor in your score, it is still an important issue to consider. When you are shopping for a new loan or credit card, do your shopping in a relatively short period of time. So to avoid these inquiries, apply for new credit only if you must.