Previously, we discussed how to build credit when you have no credit history. This discussion, is all about how to improve your credit score.
What’s my Score? How do I improve it?
First, it is important to understand how your credit score is calculated. A FICO (Fair Isaac Corp) score is a number on a range from 300 to 850, with a higher number indicating lower risk to potential lenders. Realize though that each lender and their underwriters will view your history different from one another. You can obtain a free credit report and score by visiting AnnualCreditReport.com.
Second, your FICO score is composed of 5 major components and here are some thoughts on how to improve your number. Increasing your credit score will provide you the best terms and lowest interest rates for when you buy a home, car or seek a personal loan.
Payment History 35% Maybe you have missed a payment in the past or been late. Make sure you pay past due debts first, followed by paying current owed. A collections situation, even if paid off, will stay on your history for 7 years. Moving ahead, pay all of your bills on time. Possibly consider setting up payment reminders or automatic payment options.
Amounts Owed 30% Pay off and reduce debts you owe. This is huge for life and financial success well above your FICO score. It is also good to realize that the total amount of available credit currently offered to you- if high, can be a negative on your score even if you are not using it. And if you are carrying a balance and have a high utilization % rate, that will ding your score as well. While reducing debt will help improve your score, the bigger payoff is improving your financial situation and the lasting reward of freedom from debt.
Length of Credit History 15% It takes time to build and show a consistent, responsible use of credit. Don’t cancel credit cards with long history. As well, look for errors on your credit report. Fixing an error will lead to an improved score.
Types of Credit Used 10% A mix of credit cards being paid each month and loans (installments) can show responsible handling of debt.
New Credit Opened 10% Apply for new credit as needed and don’t overdo it. In this thought, also don’t apply for several new cards within a short time frame.
Ask for help. Openly talk with your creditors. They want to be paid back, so they will work with you. Seek wise council- ask someone who has had good credit for many years for advice and/or seek professional guidance as needed. Develop a plan of action and be persistent working towards your goal. Debt can be a useful tool but it has to be understood how it works and used correctly.
To Improved Credit Scores,
Luke Fields, CFP®