Who doesn’t want a higher credit score? The median American credit score is 723; if you don’t know yours, it’s time to find out so you can improve or repair your credit. And a major bonus: you’ll save money! Bad credit can make it difficult to get new credit, increase your interest rates, lengthen the time it takes to pay down debt, and prevent you from qualifying for insurance and housing.
With the amount of foreclosures, bankruptcies and ever-changing debt collection laws, it’s important to know how the FICO score works. So what exactly goes into your FICO credit score? Here’s the breakdown:
- Timely Payment History (35%) – negative recordings, such as collections, late payments, bankruptcies, etc. will hurt you significantly here
- Debt(30%) – there are two main types here, the first being much more important.
- Revolving – this is unsecured debt, like credit and retail cards.
- Installment – fixed payment loans, such as mortgage and car loans.
- Time on File (15%) – This is the age of your credit file and the accounts opened on that file.
- Account Diversity (10%) – the balance of types of debt on file.
- Search For Credit (10%) – “Soft” inquiries for new credit, such as pre-screenings, or look-ups with your permission, remain for 6 months and are invisible to lenders. “Hard” inquiries, such as lenders pulling your file to extend credit, can hurt your score.
Are you ready to improve your score? Then follow these tips:
- Pay Your Bills on Time – this one may sound simple, but it’s probably the most important! One month of skipping bills can lower your FICO score by over 100 points, so resist the urge to forget your bills exist.
- Avoid Debt Collection Agencies – lenders don’t want to turn to agencies, since they get paid less, and you don’t want them to either. Even if you pay the full collection amount, it will still hurt to have it on your record.
- Diversify Your Debt – lenders want to see a variety of debt (secured vs. unsecured, credit vs. installment) to prove that you are credit worthy and can manage your finances
- Keep Debt-to-Credit Ratio Low – if your aggregate credit limit is $10,000, please don’t carry a balance of $9500. Try to keep your total debt on cards to less than at least 50% of your credit limit. If at all possible, try to get the ratio to 30%.
- Don’t Cancel Credit Cards – along with keeping balances low, it’s generally better to keep lines of credit open even if you pay them off. This keeps your aggregate credit limit high and therefore helps lower your debt ratio.
- Don’t Apply for Too Many Cards – this is a major red flag to lenders! If you apply for too many credit and retail cards at a time, it looks like you’re desperate for finances! Space these out.
- Decrease Your Debt-to-Income Ratio – this one may sound easier said than done, but paying down debt is one of the best ways to increase your credit score. Increasing your monthly income in comparison to debt (any little raise or bonus helps) will also build your score. If you raise your income and pay off debt, your FICO score will be up in no time!
The time to start building your credit is now. Some of these tips and changes may seem small, but when combined together they can have a sizable impact on credit score for the better. So start thinking about refinancing or that new car loan – you’re well on your way!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.