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How To Improve Your FICO Score
It used to be that "people" made decisions about your credit worthiness. You knew your banker and your handshake was all the collateral you needed. Those days are long gone, and now a single number - your FICO score - determines your credit worthiness.
Although there are several credit models, the most commonly used is FICO, based on a model created by Fair, Isaac Company. Your FICO credit score can be used to determine your interest rate and how much credit a lender will give you. So taking care of your score, and keeping your credit clean will save you money.
Preserving your FICO score, and improving it, is not difficult, but it may take time and responsibility. Here are some tips to maintain and improve your score.
Step One: Create a Credit History Report
There are many reasons you may have no credit history. Maybe you're just starting out; maybe you pay cash for everything and have never needed a loan. In any case, if you have no credit history, your FICO score is likely to be low.
The easiest way to raise your score is acquire a loan, and pay it off on time. In general, installment loans are weighted more heavily than credit cards. In other words, you will improve your credit score faster if you buy goods with an installment loan, rather than acquiring a credit card.
Another way to acquire a better credit history is to take $1000 and open a 6-months CD account at a financial institution. Now, get an installment loan for $1000, using that CD as collateral. Now, here's the trick. Take the $1000 loan, and open another 6-months CD account at another institution. Take another loan for the $1000 at the second institution. Do this one more time.
Now what you have is 3 loans. Pay the minimum payment for 6 months. In the last month, cash out your CDs and pay the loans off. You now have a credit history, and did not go into long-term debt to get it.
Step Two: Maintain Your Good Credit History Report
Good job - you have paid your bills on time, and do not have high credit card debt. Here are some ideas to keep your FICO score as high as possible.
First, don't close your old accounts. One part of your credit score is based on the amount of credit available verses amount of credit used. Closing old accounts can lower this part of your score.
Second, paying off your credit cards every month is good money management, but you may be able to improve in this area. Here's the scenario: you have a $2000 credit card. Every month, you charge about $1800 to that card. And, every month you pay it off. But here's what happens - your credit card company reports your credit information monthly to Credit Reporting Agencies. If they report it before you pay off your card, it looks like you carry a balance on your credit card every month. You may find your FICO score improves if you pay off your credit card at a different time of the month.
Step Three: Repair Your Poor Credit History
For whatever reason, if you have a poor credit history, there are things you can do to improve your score. It's possible that there may be inaccurate information on your credit report that can be easily cleared up (see
How To Dispute Your Credit Report Errors). If this proves to be the case, then you should contact one of the three credit reporting agencies-TransUnion, Experian or Equifax. Some of them take time, and you will probably be best served by talking to a credit counselor to be sure that you not only repair your credit history, but also eliminate what caused that poor credit history in the first place.
The most heavily weighted part of your score is based on your payment history. But you can raise your score over time by demonstrating that you consistently manage your finances responsibly by:
- Pay your bills on time.
This is the best way to improve your score, and it's never too late to start. Even if you've had serious delinquencies in the past, those will be counted less over time if you keep paying your bills on time.
- Keep balances low on your credit cards.
High outstanding debt can pull down your score. Don't go stretch out your credit cards to the limit.
- Pay off debt rather than moving it around.
Consolidating your credit card debts onto one card. If you spread it over multiple cards will not improve your score in the long run. The most effective way to improve your score is by simply paying down the amount you owe.
- Keep your credit cards - but manage them responsibly.
In general, credit cards and installment loans that you pay on time will raise your score. Someone who has no credit cards tends to have a lower score than someone who has managed credit cards responsibly.
- Avoid open multiple accounts very quickly, especially if you have a short credit history.
Opening too many accounts in too short of a time period can look risky because you are taking on a lot of possible debt. New accounts will also lower the average age of your existing accounts, something that your FICO score also considers.
- Avoid open new unneeded credit card accounts.
This approach could backfire and actually lower your score.
- Avoid close an account to remove from your record.
It's a myth that closing an account removes it from your credit report. This is untrue-even closed accounts remain on your report, possibly for an indefinite period of time and may still be factored into the score. In fact, closing accounts can sometimes hurt your score unless you also pay down your debt at the same time.
- Shop for a loan within a short space of time.
FICO scores distinguish between a search for a single loan and a search for many new credit lines, based in part on the length of time over which recent requests for credit occur. If you shop for a number of loans over a long time period, it can count against you.
These won't improve your score immediately, but the sooner you begin managing your credit well and making timely payments, the sooner your score will get better. Your FICO score is an important part of your financial life, and using these three steps may help improve your FICO score. Before making any drastic changes to your finances, consult with a financial advisor.
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