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How to Improve Your FICO Score
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FICO Score |
Annual Percentage Rate |
Monthly Payment |
760-850 |
5.901% |
$890 |
700-759 |
6.124% |
$911 |
660-699 |
6.409% |
$939 |
620-659 |
7.221% |
$1,020 |
580-619 |
8.320% |
$1,134 |
500-579 |
8.987% |
$1,206 |
Your score is computed using five different factors, but we’ll just highlight the two most important ones that together account for almost two-thirds of your total.
Leading the list with a 35% impact is your payment history. The three credit reporting companies (Experian, TransUnion and Equifax) look at any bill you pay over time, including mortgages, major credit cards, department store credit cards, car loans, and other installment loans such as for furniture or electronics. They will look at public records such as bankruptcies, foreclosures, liens, wage garnishments, lawsuits and judgments. And you won’t be surprised to learn they pay close attention to the details of any late or missing payments.
The second most important factor, that accounts for 30% of your score, is your credit balances. First, the credit reporting companies add up everything you owe from all sources. (Have you done that lately?) Then they’ll see how much of your original installment loans you still owe (such as on your car), and they’ll calculate how much available credit you have on your charge cards. It helps your score to have credit available that you’re not using. So maxing out your credit cards will count heavily against you.
First of all, you’ll need to know where you stand right now. You can get a free credit report once a year, or anytime you’re turned down when applying for a loan. Go online to www.annualcreditreport.com (or call toll free: 1–877–322–8228) and review the report carefully. Report any errors you find in writing to all three services (TransUnion, Experian, Equifax). They must respond with 30 days or else remove the outdated information. Unfortunately, they won’t give you your score for free, but it’s under ten bucks to get that.
To start improving your FICO score, you’ll need to start living slightly below your means. Make sure you pay all your bills on time. You need to start lowering the amount owed on your credit cards, which means making more than the minimum payment. It’s better to pay off a credit card than to move your balances to lower rate cards. Your goal is to get the amount owed on each card to 30% (or less) of your available credit. So if you have a $10,000 credit line, getting your balance down below $3,000 will help immensely. Remember, you’re trying to prove you can handle additional debt, so make it obvious you are in clear control over your existing debt.
Another strategy is to open a department store or gasoline
credit card. Use it once for a small amount, pay it off in full as soon
as you get the bill and put the card away. Now you have a credit line
that’s fully available, but that you’re not using. This
shows financial discipline, as long as you don’t give in to temptation
and start running up more debt!
Once you do pay a card all the way down, don’t close the account.
You can cut up the card so you won’t use it, but the length of
your credit history is one of the factors in your FICO score we haven’t
mentioned. That’s why someone who has always paid cash has a low
FICO score — they don’t have enough history with loans to
demonstrate they can handle them.
It doesn’t take long to bring down your FICO score, but it will take 6-12 months of “good behavior” to show a significant improvement in your score. If you’re serious about home ownership you can make it happen. It will take some discipline and possibly a change in your buying habits. You may need to distinguish between things you’d like to have (lottery tickets, those cute shoes, that plasma TV), and things you need to have (nutritious food, a safe place to live, adequate transportation). No one said this would be easy, but if your WHY is big enough, you’ll figure out the HOW. Good luck!
