If you have applied for a loan or a credit card, chances are you have heard about your credit score. What you may not know is that there are several different types of credit scores used by lenders and credit reporting agencies. The most commonly used credit score, and the one to which I will be referring to in this article, was created by the Fair Isaac Corporation referred to simply as your FICO score. What many do not understand is what this score entails and how it effects you as a consumer.
Your FICO credit score is a three digit number ranging from 300 to 850 and is used by lenders in ascertaining your credit worthiness. Lenders will use this score in determining whether you are a low or a high risk when assigning credit. Having a low score (typically below 600) does not necessarily mean you will be denied credit, however, if you are determined a high risk the lender may increase your interest rate substantially.
So how do you go about improving your score?
Many people believe that by simply paying their bills on time they will have a higher score than those who do not. Whereas payment history accounts for the majority of the scoring calculation, there are other factors involved that may increase or decrease your score significantly. These factors include: the amounts owed on your accounts; the length of time your accounts have been open; the number of new accounts opened; and the types of credit used (i.e. installment loans, revolving credit, etc).
Despite what some advertisements claim, there is no overnight solution to increasing your credit score. Since your FICO score is based on information obtained within your credit reports, it is imperative that you are aware of what is being reported to the three credit bureaus: Equifax, Experian and Trans Union.
Obtaining your credit reports is easy and free once every 12 months due to a recent amendment to the Fair Credit Reporting Act. For more information on how to obtain your free reports, visit the FTC’s website: http://www.ftc.gov/bcp/conline/edcams/freereports/index.html
Once you have received all three of your credit reports, review the information listed to insure its accuracy. Contained within your reports are four basic areas: personal information such as your name and address; public records such as judgments, bankruptcies, etc. that has been filed; a listing of your creditors including the type of account, date opened, credit limit, balance and payment history; and a listing of credit inquiries. Each of the reports will contain information on how to dispute any errors you may find within.
Once you have reviewed your credit reports and resolved any errors within you are now better equipped to improve your score. Below are five simple steps you can use to improve your score over time:
1. Pay your bills on time. If you have been delinquent on any accounts, bring these current and keep them current. Though your credit report reflects information over the past 7 years, a delinquent payment six years ago does not factor in as highly as one made 6 months ago.
2. Apply for new lines of credit only when you need them. Voluntary inquiries on your reports can negatively affect your score, however, if these inquiries are within a short period of time they will not have an adverse effect. For example, having your credit report pulled several times for a better rate on an auto loan will be overlooked if done within the past 30 days as opposed to applying for several different credit cards at once.
That being said, giving into the temptation of a 10% discount at the checkout counter of your favorite department store may seem like a good idea at the time but can ultimately hurt your chances of obtaining credit and a decent interest rate when you need it most.
3. Keep your balances low on your credit cards. Even with an excellent payment history your score may be lower depending on how close your debt is to your credit limit.
4. Do not be afraid of credit counseling. If you have several delinquent accounts and are having difficulty bringing them current and keeping them current on your own, seek professional help from a legitimate credit counseling agency. Though your accounts may reflect repayment while on a debt management program, these programs help you establish a better payment history and over time your score will increase.
5. Avoid bankruptcy at all costs. Bankruptcy should be an option only after all others have been exhausted. Whereas several delinquent and charged off accounts do have an adverse effect on your credit score, these can be improved over time through developing and committing to a repayment plan. A bankruptcy however will remain on your credit report for ten years before it disappears.
To learn more about your FICO score, visit their website at http://www.myfico.com.
To learn more about your rights on credit reporting, visit the Federal Trade Commission’s site: http://www.ftc.gov/bcp/menus/consumer/credit/rights.shtm