Liz Roberts asked:


In the simplest terms your credit score is your credit history calculated in figures. There are many methods which can be used to calculate your credit score but the most common method is the FICO. FICO was developed by the Fair Isaac Company and is the preferred method used by most lending companies. Your credit score determines whether a lender will approve your application or not or whether a lender will give you less rates on your payments or not.

Credit scores or FICO scores generally range form a low of 340 to a high of 850. Ideally, you should aim for a score of at least 700 or more. If you get a score of 600 and below, creditors will likely consider you as a high risk borrower.

Knowing how your credit score or your FICO score is calculated will help you become more aware of your spending and your payment habits. Let’s consider the break-down of categories used to sum up your credit score.

What comprises your credit score?

35% of your credit score depends on how good of a payer you are. If you make it a point to pay all your bills promptly, you should have no problem obtaining the complete 35% of your credit score. However, if you’re in the habit of delaying or skipping payments, or if you defaulted on some of your debts, your credit score will also be affected.

30% of your credit score is calculated based on the level of your debts. Do you always maximize the use of your credit limit? Were there instances that you’ve even exceeded your credit limit? If so, then you’ll likely get a low score on your credit utilization. Hence, borrowers are advised to keep spending below their credit limit. As much as possible, keep your balances at least 50% lower or even less of your credit limit

15% goes to the length of your credit history. How long has it been since you started your credit report? The longer your length of credit history is, the better your score will be. This is because, the more information your creditors can get out of your credit report, the better they can gauge you as a borrower. This is why it is very important to establish a good credit report as early as you possibly can. Also, this is the reason why you should always think twice before closing accounts that you’ve had for a long time.

10% of your credit score is based on inquiries. If you’re in the habit of submitting credit card applications just for the heck of it, your credit score can be affected. Also, whenever a creditor denies your application, it can also have an impact on your FICO score. Thus, before submitting any application, see to it that you really intend to get an approval out of it.

The other 10% of your credit score is based on mix of credit. If you have a credit card account, a car loan, a mortgage loan and various types of insurance policies, it will show your flexibility and dependability as a creditor. If you’ve been able to manage all these different types of accounts without any problems on your payments, then you’ll likely get a perfect score on this category.

Stephanie N asked:


I am trying to repair my credit by sending debt settlement letters to the collections agencies listed on my credit report, but they are not being cooperative. Most are saying they CANNOT settle the debt nor are they willing to delete the listing from my credit report after the debt had been paid. I don’t trust any of these non profit credit counselors, but I need some guidance. I am begining to lose hope that this is even worth the trouble. Any advise?

Dewey Kearney asked:


OK. So you’ve ordered your credit report and seen your credit score. Now you see the cold, hard truth – it’s downright ugly and you wonder if you can really salvage your credit and ever get a decent interest rate on a home or car loan – forget about credit cards!

Take heart! With a few steps and a plan of attack you can improve your credit score and start on the path to recovery. Corporate trainer and credit counselor Bruce McClary of Richmond, VA offers 5 ways to boost your credit score.

Get It Right

Accuracy is the first thing to look at and is the fastest way to boost your credit score. Find and fix any mistakes that could be pulling your score down. Credit scores are based on the information contained in your credit reports. If you are one of those who haven’t seen your credit report in several years, make sure you order a copy of all three reports because each will be different.

Pay Your Bills On Time

Paying your bills on time helps you build and maintain a healthy payment history. Paying your bills on time is the largest factor in determining your credit score (at 35%). This is the best way to rebuild damaged credit. If you want noticeable results try paying your bills on time for 12 months. It will make a difference. If you don’t have a track record that goes back years and years but only a few months then you can get your score back within that 12-month period. If your history goes back further it could take longer but this is the biggest factor.

You can expect information about past-due payments to stay on your report for up to seven years. Your score can still improve as long as you make regular on-time payments.

Get Back – You Are Too Close To The Edge

If you think you are doing everything right, the next thing is to look at the amount of your outstanding credit card debt and your debt-to-credit ratio. If you reduce these debts it can make a significant difference, especially if you are near your credit limit on any of these cards.

You never want to be maxed out and the ideal limit is 35% to 40%. Keeping your debt spread out is better for your score than having all your eggs in one basket.

Next, focus on the amount of outstanding debt – this is 30% of your score. Put together the outstanding debt and payment history account for 65% of your credit score. Pay off your debt rather than move it around. A lot of people like to play the balance transfer balance game. Closing an account and transferring that amount means that you’re increasing your debt ratio.

Here’s a tip: Take the smallest balance and try to pay it off first, while making minimum payments on the others.Then when that balance is paid off take the next smallest one and double up on it, etc. etc. This gives you reachable goals, and psychologically it’s encouraging because you see yourself actually paying OFF the debts.

Commit For The Long Run

15% of your score is determined by how long you have had the credit relationship. This may sound silly, but don’t close any accounts if you plan to shop for a mortgage or other type of loan where you will need a good score. Opening new cards and closing old ones will negatively impact your credit score in the short run.

You want to have a couple of credit cards to develop a credit history, but adding more credit card debt can be dangerous. It’s better to limit your credit cards to two, keep the balances low and pay them off quickly. Be careful using them and equally important is having a savings account to fall back on.

Look Before You Leap

When you apply for a loan or a credit card, lenders pull your credit. These inquiries put a temporary dent in your credit score. The best way is to start your loan search by shopping and comparing rates rather than applying for a loan and deciding later.

Also it is best to do all your shopping within a month’s time. This can be very important. Mortgage and auto loans are counted as one inquiry if they fall within a 45-day period in the FICO scoring.

Inquiries have the least impact on overall score. Inquiries, types of credit and the number of loans play into the final figuring of your score.

Additional note though: If your credit score is significantly bad – 585 or below – don’t apply for multiple car loans or mortgage loans “shopping the rate.”Each credit pull will temporarily take your score lower, and lenders dealing with low credit scores typically charge around the same interest rate so shopping all around town and having your credit pulled is really not going to help you in the long run.

Having a bad credit score does not have to ruin your life. Make a plan to pay off your debts and stick with it! Within 12 to 18 months you’ll be surprised at how much you can significantly increase your credit score with good payment history and lowering your overall debt vs. income ratio!

Cathy Taylor asked:


Why do some people get offers for pre-approved credit cards and others don’t? What do car dealers know about your financial health that you don’t know? The answer is your credit score.

Your credit score is a number generated by a mathematical formula to estimate how likely you are to pay your bills. Based on the information in your credit reports from the three credit bureaus, Equifax, Experian, and TransUnion, your credit score has been a factor in your ability to qualify for loans and good interest rates for more than twenty years. Lenders compare your credit report with millions of others to determine your score.

While there are a variety of credit scoring methods available to lenders, the most widely used is the FICO score. Based on a scoring system developed by Fair, Isaac & Co., FICO scores range from approximately 300 to 800 points and are provided to lenders by the three credit bureaus. You also have access to your FICO scores but will be charged a fee by each credit agency providing your report.

According to Fair Isaac, the credit scores of the American public are divided as follows:

• 499 and below 1 percent

• 500-549 5 percent

• 550-599 7 percent

• 600-649 11 percent

• 650-699 16 percent

• 700-749 20 percent

• 749-799 29 percent

• 800 and above 11 percent

A score of 720 or higher will probably get you the best interest rates on a home mortgage. Your credit card company looks at your credit score to decide whether or not to raise your credit limit or charge you a higher interest rate. The higher your credit score, the better you look to lenders and the lower your interest rates.

Several factors affect your credit score including your payment history, the length of your credit history, any outstanding debt, how long and how often you’ve had derogatory credit information, such as bankruptcies, charge-offs, or collections, and the amount of credit you are using compared to the amount of credit available to you.

So how do you raise your credit score? Well, the first thing to do is to order a copy of your credit report with the score included from each of the three credit bureaus. Review your reports and note any discrepancies. Correcting blatant errors is the first step to repairing your credit, and changes can take up to three months to be recorded.

Next, remember to pay your bills on time. It may seem like a small thing at the time you’re writing that monthly check, but an accumulation of timely payments says a lot to a potential lender looking for a reliable client. Prompt payments in the last few months can actually make a big difference in your credit score.

While collections, bankruptcies, and late payments have the greatest negative effect on your credit score, your debt is a factor as well. Keeping your account balances between 25% and 50% of your available credit signals a responsible borrower. For example, if you have a credit card with a $2000 limit, keep your debt below $1000. For this reason, consolidating your credit card debt can actually lower your credit score, as it raises the ratio of your debt to your available credit. The best solution is to simply pay off your existing cards as quickly as possible.

Excessive inquiries over a short period of time also damage your score. When lenders, banks, or credit card companies check your credit report, the inquiries are recorded. Several of these “hard inquiries” in the same time period may signal to other lenders that you are opening multiple accounts due to financial difficulty.

If you discover that you have accounts on your report that you didn’t open, or your public records such as tax liens or judgments that are not yours, you may be a victim of identity fraud. It is up to you to deal with the damage that can happen to your credit score because of this criminal activity. Being aware is your first step, but when the items end up on your report, you have no alternative but to clean it up.

Overall, give yourself time to build a good credit score and even more time to correct serious problems. The length of your credit history is another determining factor in a good score. Lenders want to know that you are able to maintain prompt payments and good standing for a period of time. So check your reports yearly, do your due diligence, and your score can improve.