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How To Raise My Credit Score
Your Payment History - 35% Your payment history takes in account the timing of your past payments on accounts such as your credit card, retail accounts, and your mortgage. It also takes into account any bills that have gone to collection such as utilities and medical. A quick story to illustrate the effect that payment history has on your credit score. In college I was in a car accident. Wasn't my fault, but the other driver didn't have insurance. He was going to pay me out of pocket. I had the bill from the hospital sent to my dorm room. However, I switched dorm rooms between 1st and 2nd semester. Being a dumb 19 year old, I forgot all about the situation. Turns out the bill ended up going to collections. This one mistake six years ago, cost me when I went to apply for a mortgage last year. One thing I do have going for me that’s important for you to know is that FICO places a higher value on recent behavior. Since my bill that was sent to collections was over 6 years ago, it doesn’t have nearly as much effect on my credit as a bill that was sent to collections say last month. This is also why some people have reported their credit score dropping by 100 points just from one missed payment. There is no secret behind optimizing your payment history, pay your bills on time. Even if it’s just a minimum payment. It's the #1 thing you can do to improve your score. (Which means missing a payment is the #1 thing you can do to hurt your score) Amounts Owed - 30% The amounts owed portion, mostly refers to the ratio of outstanding debt to the amount of credit you have available. You might have also heard this called credit utilization rate. For example, if you had one credit card with a balance of $500 and a limit of $5,000, your credit utilization rate would be 10%. We don’t know what the best credit utilization rate is. However, we do know some basic facts. Don't max or come close to maxing out your available credit. More specific, don't go beyond 33% of your available credit. You want to use at least some credit. Therefore, a utilization rate of 0%, could actually hurt your credit score. Shoot for the lowest percentage you can, with a reasonable credit limit. A good rule of thumb, is that the credit limit on your credit cards, shouldn't exceed your emergency fund. Another fact to keep in mind is that lenders report your balances to the credit bureaus randomly. Some lenders might report your balance on a certain day every month, some lenders might report your balance on a certain day of the week, and some lenders can even report your balance quarterly. This explains why people who never carry a balance on their credit card (who are some smart people may I add) still show a balance. Therefore, it’s important to keep balances on revolving debt, way below your credit limit at all times. For people who are responsible with paying your bills on time, I repeat if you're responsible for paying your bills on time, a good tactic to increase your utilization rate is to call up your credit card company and ask for a limit increase. Please only do this if you have always managed to pay your bills on time (yes I know, I said that 3 times in this paragraph but it's really important) and have an adequate emergency fund. Length of Credit History - 15% 15% of your credit score is based upon how long you have had credit. Your credit score considers both the age of your oldest account and the average age of all your accounts in the equation. The longer your credit history, the better. This is why it's a good idea to apply for a card when you're young and keep that card for life. It's also why it's a bad idea to cancel your oldest card. Although it's not my primary card, I still have my first card for this reason. I applied for it in college, and put only groceries on it. Today I rarely use this card, but make sure to put a charge on there every few months so this account isn’t cancelled. I keep this card active because you want to always have some activity on your lines of credit. Credit card companies are now cancelling cards that have not had an activity in a long time without your approval. New Credit - 10% Would you lend $100 to a friend who borrowed $100 from three other friends yesterday? Of course not. Which is why lenders, don't like to see a lot of new activity, such as applying for multiple new lines of credit. The FICO score equation takes into account: New accounts applied for Accounts that were opened Length of time since you last applied for credit Length of time since you opened a new credit account The key is to keep activity down to a minimum. You won’t be able to avoid all inquires on your account, but there are techniques I will discuss later to help minimize credit inquires. Types of Credit Used - 10% Lenders prefer to see a variety of credit on your credit score. For example, it's better to have a student loan, a credit card, and a car loan then three credit cards. Don't go out and buy or car or a house just to please FICO here. The most important thing is to have at least one credit card from a major bank. In the eyes of FICO, being responsible with a major credit card, proves that you can handle other types of credit. What It All Comes Down To Many people try to crack the FICO equation to raise their credit score. FICO has never and will never release the exact equation. It all comes down to common sense though. Pay your bills on time, don't use all of your credit available, and don't close your oldest account. This is all it takes, to raise your credit score. Article Directory: http://www.articledashboard.com RJ Weiss purpose in life is to educate all of Gen Y on the basics of personal financial planning. He currently maintains the blog GenYwealth.com and has a free eBook The Gen Y Guide to Managing Your Credit you can download right now for free! |
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