Fair, Isaac & Co. generates FICO scores used by the majority of financial institutions. A credit score is the measure of a consumer’s financial well-being and creditworthiness.
However the FICO score can be a source of confusion for consumers, especially in terms of how to improve it and what actions may decrease it. Fico scores range from 350 to 850. The higher your credit score, the better.
You are more likely to be approved for credit cards, mortgage, personal and auto loans with a higher credit score. The interest rate on a loan tends to be lower the better a Fico score.
According to FICO, the average score in the U.S. is approximately 700. Almost every bank in the United States uses a FICO score when deciding to make a loan. But even though the scores are important, they are certainly not the only measure.
The primary factors FICO considers are:
- The total amount of debt a consumer is responsible for paying.
- The length of time the consumer had the debt.
- The amount of any new debt the consumer has accumulated. Recent debt obligations are riskier than older debt the consumer has been paying for some time.
- The amount of available credit the consumer is currently utilizing. Consumers who are at, over or close to their available credit limit signal danger.
- A good credit mix is also a key factor. Having nothing but credit cards in your credit file is not as good as having a credit card, mortgage loan and a car loan.
Three ways to increase your FICO score:
1. Make timely payments on all your obligations. Missing a payment if you are normally late on your bills will not hurt your credit score as much as missing a payment if you are never late on your obligations. One late payment on an otherwise good credit report can lower your score by as much as 100 points.
2. Stay clear of your credit limit. If possible, do not use more than 30% of your available credit. As stated above, consumers which have account balances close to their credit limits signal a risk and your score will suffer. Paying down on your debt will increase your credit score.
You can begin with one debt at a time. For example, a credit card with a $500.00 limit and a balance at or close to that available limit will hurt your credit score. Lowering that balance to less than 30% of the available credit will help your credit score. You do not have to start with your higher balance accounts, start where you can, it will make a difference.
3. Apply for new credit sparingly. Consumers who apply for many credit cards in a short period of time signal to FICO an attempt to open multiple accounts simultaneously; and, as a result, points will be taken off your FICO score. However, consumers who are seeking a car or mortgage loan that make multiple applications within a few days, signal to FICO you are shopping for the best interest rate and your FICO score will not get a ding.
Now, that you know how to improve your credit scores, you really should get your credit scores. You cannot improve on something you may be guessing about. Find out your credit scores today so you can be on your way to a better credit rating. Monitor your Equifax credit score with Equifax ScoreWatch™ and your Transunion credit score with TrueCredit.com 3-Bureau Monitoring by Transunion.
