People in the US talk a lot about credit scores. It's one of the most common topics of conversation. This is because a person's credit score has a big effect on how much they pay for a mortgage, a loan, and many other financial services.
To put it simply, a credit score is like a report card (I know, we've all had them), where a low score would get you in trouble and a high score would get you a reward.
Many people think that there is one way to classify credit score, but there isn't. For example, the last time you took an extra 5 cents from the cashier, it wouldn't show up on your credit score.
In the United States, however, there is a well-known credit score that is often used. It is called FICO, which stands for Fair Isaac Corporation. A person's FICO score basically shows how likely it is that they will not pay back a loan, and most banks and credit companies use this tool.
Before talking about how to improve your FICO score, it's a good idea to have a general idea of what it's based on.
Basically, the FICO rating is made up of a few statistical parts. These statistical parts are: -
- 35% - Payments have been on time in the past
30 percent: the amount of debt, shown as the ratio of current revolving debt (credit card balances and other types) to total available revolving credit (credit limits)
- 15% - How long you've had credit
-10% - types of credit used (installment, revolving or consumer finance)
- 10%: How recently you looked for credit or how much credit you got recently.
Get a copy of your own credit report. This is the first step to improving your FICO score. This information can be found at Equifax, Fair Isaac, TransUnion, and Experian.
After that, get ready for the pain (or pleasure, if you're an accountant) of going through all the numbers and making sure that, as far as you know, everything adds up.
Reason is that if there are mistakes in the report, it's best to get them fixed right away because it can take up to months to get a proper correction.
Second, you should pay off your credit card debt as soon as possible if you have a lot of it and most of your balances are close to the credit limit.
Banks and other lenders like to see a big difference between the amount owed on a credit card and the credit limit, about 40 percent. As credit card debt makes up 30% of the FICO score, paying off any extra credit card debt would definitely raise the FICO score.
Next, paying off your debt on time is just as important. Even if you can pay off your debt, it won't help your FICO score if you don't pay it on time every time.
35 percent of your credit score is based on how on time you are with your payments, and it's important to know that paying your debt on time now is more important than paying it on time 3 years ago.
It's always important to keep your account with the longest history. This is because the longer you've had a credit history, the easier it is for creditors or banks to figure out how reliable your FICO score is.
For example, even if you have a pretty good credit score, if your credit history is only 5 years long and someone else's is 30 years long and their score is average, the person with the longer credit history might get a bigger loan or a lower interest rate.
When it comes to raising your FICO score, it's not rocket science. All you have to do is pay down your credit card debt, make sure you pay your bills on time, and keep track of where your spending, mortgage, and loans are going. This shouldn't be too hard, right?
