Saturday, January 10, 2015

9 Ways to Boost Your FICO Score

Your credit score it is one of the most critical factors in your financial life. It determines if you will be approved for a loan or line of credit. Credit scores are used to determine: if you will be hired for a job, interest rates, terms and conditions, downpayment costs, rates for medical and other insurance coverage, approval for cable and internet service and more. According to a survey by the Demos group 1 in 10 Americans are denied jobs due to their bad credit.

A credit score is a mathematically calculated number developed by the Fair Isaac Corporation (FICO) that lenders use to rate potential customers in determining the likelihood that a customer will pay their bills on time.

A credit score or credit rating is determined by using five main criteria as defined by your payment history which accounts for 35% of your credit score, the amounts owed which accounts for 30% of your credit score, the length of your credit history which accounts for 15% of your credit score, new credit which accounts for 10% of your credit score, and the types of credit used which accounts for 10% of your credit score.

Payment history shows the history of how you paid your bills either on time or late but unfortunately does not show if your bills were paid before the due date. Amounts owed shows the total amount of credit you have available. The length of history indicates how long you have had credit. New credit indicates how many times you have applied for new credit. If you open too many new accounts in a short period of time this may lower your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts are usually credit cards and installment accounts are usually mortgages, auto loans, etc.

The FICO credit score model ranges from 300-850 with 850 being an excellent score and 300 being the worst score. The higher the credit score the lower the interest rate you will receive for a loan or line of credit. Possessing a good credit score can save you thousands of dollars in interest over the life of the loan or on a line of credit. A good credit score is generally in the range of 720 or above but may vary from lender to lender.

When applying for credit or a loan if all three credit scores are pulled, the middle score is generally the score used with the application.  Your credit score varies from each bureau because each agency collects their own data from various sources and may collect different data for the same account. Your score can vary anywhere from 5-40 points between the three credit bureaus.

Your credit score changes due to updates to your credit file which changes based on account activity such as balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts more than 7 or 10 years old). As a result, you may see a difference in your score from one month to the next.  If you have bad credit or a low credit score here are 9 things you can do to boost your FICO credit score:
  1. Review your Equifax, Experian and TransUnion credit reports at least once a year at  
  2. Errors. Fix errors on your credit report. 
  3. Keep total amount of debt owed low.  Keep credit card balances at 20% or less of the credit limit.
  4. New Accounts. Number of new accounts opened. Don’t open more than one new account every 2 years.  If you are applying for a mortgage loan or credit card shop within a 2 week period, the inquiries will count as one inquiry (versus multiple inquiries). 
  5. Denied. Don’t apply for credit if you know you will get denied the inquiry will temporarily lower your credit score.
  6. Mix of accounts. You need a mix of revolving (credit card) and installment (loan) accounts to boost your credit score.
  7. Payment history. You will need a payment history of at least 7 years or more with no late payments to have excellent credit. You will need a payment history of at least 3-5 years with no late payments to have good credit.
  8. Length of credit history. You will need a credit history of 2 years or more to establish a decent credit history profile. 
  9. Pay your bills on time. Get current on all late accounts.         

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