November 21st, 2019 9:11 AM by Jackie A. Graves, President
The FICO credit scoring
formula is a closely guarded secret, but much of the methodology
behind it is not. We know the general categories of information that make up
the FICO formula, as well as the relative weights of each. While not everyone
has the same credit issues, here are a dozen credit improvement tactics that
could help you take your score to the next level.
This is the most obvious way, but it’s also the most important,
so it’s worth mentioning. The most important category of information in your
FICO® Score, your payment history contributes about 35% of the total. In other
words, there’s no more powerful way to increase and maintain your credit score
than simply paying your bills in a timely manner, month-after-month, for a long
period of time.
The second most influential category of information in your
FICO® Score is the amounts you owe, and revolving debts like credit cards can be a major
drag on your score. This doesn’t necessarily refer to the actual dollar amounts
of your debts -- after all, a $200,000 mortgage isn’t inherently worse than a
$100,000 mortgage. Instead, the most important part is your debts relative to
your credit limits or original loan balances.
For this reason, one metric to keep an eye on is your credit
utilization ratio, which is the amount of outstanding credit card debt you have
as a percentage of your available credit. For example, if you owe $1,000 on a
credit card with a $4,000 limit, your utilization ratio is 25%. This is
considered in the FICO methodology on both an overall and per-account basis,
and experts generally agree that you should aim to keep yours under 30%.
While lower credit utilization is generally better, it’s also
true that carrying a small balance can be better than none at all. While this
may sound counterintuitive, think about it this way -- lenders want to see that
you not only keep your debts low, but that you can be responsible enough to
actively use and manage your credit. If you aren’t using your credit at all,
how does a lender know you can use it responsibly?
In fact, the average FICO "high achiever," or consumer
with a credit score of 800 or higher (average of 826) uses 5% of their total
revolving credit limits.
Continuing on the "amounts you owe" category, this
also considers your installment debts (aka loans). Specifically, as you pay
down your loan balances, it can be a major positive catalyst for your FICO®
So one way to give your credit score a quick boost is to make an
extra loan payment (or more) in order to accelerate your repayment. The best
part is that when it comes to installment loans, such as mortgages, credit
cards, or personal loans, any extra amount you pay gets applied entirely to the
principle, and therefore can help your credit score even more than a standard
It’s a common misconception that closing unused
credit cards is a positive catalyst for your credit score. In reality,
the exact opposite is generally true.
Here’s why. Let’s say that you have two credit cards -- one that
you use all the time with a $2,000 balance and a $5,000 credit limit and
another with a $3,000 limit that you rarely use. At the moment, your $2,000
balance only represents 25% of your $8,000 in total available credit. If you
close the unused card, that same balance now represents 40% of your available
Closing an unused credit card can also hurt you in the
"length of credit history" category, which accounts for 15% of your
score. Among other factors, this considers the average age of your credit
accounts, and the ages of your individual accounts, so if you close an older
credit card, it can reduce these time-related factors.
To be clear, there are certainly some good reasons to get rid of
old credit cards. For example, if your unused credit card has an annual fee and
you aren’t taking advantage of the benefits, it can be worthwhile to cancel and
absorb the small credit score impact.
If you have collection
accounts on your credit report, dealing with them can seem highly unpleasant. However, there’s
one key point to remember -- when a collection agency is reporting an unpaid
account to the credit bureaus, nobody wins.
My point is that it’s in the collector’s best interest to
receive some money -- after all, they probably bought your debt for pennies on
the dollar. And it’s in your best interest to get the unpaid collection off of
your credit. Therefore it’s in everyone’s best interest to work out a deal.
You may be surprised at how effective it can be to simply have a
conversation with your debt collectors. If you truly want to reach a reasonable
deal, they’re usually willing to work with you. People often have success with
offering a partial payment in exchange for reporting the account as "paid
in full" or removing it entirely. (Tip: Get any deal terms in
writing before you send any money.)
There’s a category in the FICO formula called "new
credit" that considers two main things -- any credit accounts that you’ve
recently opened, and any times you’ve applied for credit recently, regardless
of whether a new account was opened.
So if you have new credit accounts, or have applied for credit
within the past year, one effective way to increase your credit score is to
simply let them get older and not add any new accounts or inquiries to the mix.
Don’t get me wrong -- if you need to apply for
credit, go for it. However, it’s a positive catalyst to your credit score to
limit credit applications as much as possible.
A Federal Trade Commission (FTC) study found that about
one-fifth of all Americans’ credit reports contained some type of error. And 5%
of all credit reports contained errors that not only lowered consumers’ credit
scores but lowered them to the point where they could have otherwise obtained
lower interest rates on loans.
While this clearly won’t be effective in 100% of cases, it’s
important to regularly check your credit reports (not just your scores) for
errors. If you didn’t know, you’re legally entitled to one free copy of your
credit report from each of the three major credit bureaus once a year, and the
official place to get them is www.annualcreditreport.com.
In addition to errors, also check if any outdated negative
information is still being reported. In general, negative items such as late
payments, charge-offs, and collection accounts can only be reported for seven
years from the date the account first became delinquent.
If your credit isn’t exactly good (trust me, I’ve been there), it can be
difficult or impossible to get a credit card, especially one with decent terms.
The problem is that it can be difficult to rebuild or establish credit unless
someone is willing to extend you credit in the first place.
A potential solution to this is to obtain a secured credit
card. These work in much the same way as standard credit cards,
except that you’re generally required to make a deposit equal to your initial
credit limit, thereby taking the risk away from the credit card issuer. Your
account activity will be reported to the credit bureaus as if it were a
standard credit card and can be a big positive catalyst to your credit score
Here’s an outside-the-box way to increase your credit score.
When most people learn about the "amounts you owe" category of the
FICO formula, the logical answer is to pay down your debt to maximize your
However, that’s not the only way. You can also ask your
creditors to increase your limits, which will produce the exact same effect.
For example, let’s say that you owe $3,000 on a $5,000 credit
card. You are using 60% of your available credit. If you pay off $500 of the
balance, you’ll only be using 50%. Alternatively, you can ask your issuer to
increase your credit limit to $6,000, and it would also lower your usage to
50%. To be clear, paying down your debt is the better move from a financial
perspective, so it’s still important to do that, but raising your limits can be
just as effective when it comes to boosting your
Your "credit mix," or the variety of credit accounts
on your report, counts for 10% of your FICO® Score. In other words, having a
few different kinds of installment loans (mortgage, auto, etc.) and a revolving
line of credit or two is better than only having a single type of credit
The logic here is that lenders want to see that you can be
responsible with all types of credit, not just one or two.
After all, if you’re applying for an auto loan, but have never had an
installment loan, it’s a riskier loan in the eyes of the lender, even if you
have a flawless track record with your credit cards.
As a final thought, it’s important to mention that many of the
suggestions on this list, such as paying your bills on time or obtaining a
secured credit card, aren’t effective immediately.
The bottom line is that the most effective way to increase your
credit score is a combination of good credit behaviors and time.
You can build decent credit fairly quickly, and there are a few things you can
do to give you a quick boost. However, truly excellent credit takes time.
There’s a reason that the average person with a FICO® Score in the
"excellent" 750-799 range is 50 years old, and that the average
person with a sky-high 800+ FICO® Score is 61.
when you’re trying to maximize your credit score, it’s important to be patient
and stay the course. It’s worth the wait -- great credit can save you tens of
thousands of dollars (or more) over your lifetime.
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