Michael Rasco asked:


A person’s credit score, often referred to as their “FICO” score, is an important tool that lenders use to help determine the creditworthiness of a potential borrower. If you want to make a large purchase, such as a house, for which you will need financing, you want your score to be as high as possible. To understand how to improve your overall credit rating, it is imperative you understand what factors influence your FICO score.

Payment History

Do you pay your bills on time? Most creditors, lenders, and service providers will charge a fee if you do not. Obviously, the biggest thing wrong with that is the egregious waste of money. What is worse in the long term is that after 30 days of nonpayment, the lender will likely report you to one of the major credit bureaus. (In the U.S., there are three such credit bureaus: Experian, Equifax, and TransUnion.) Considering that thirty-five percent of your credit score is based on payment history, it becomes clear how important it is to keep up with your financial obligations. No other single factor has that much influence on your FICO score.

Debt to Total Credit

The ratio of your outstanding debt to the total of your credit lines and loan amounts counts for thirty percent of your credit score. For example, if you have a credit card with a limit of $5000, and you owe $4000, your debt to total credit ratio is eighty percent. After paying down $3000 of the principle, your outstanding balance is $1000, giving you a ratio of twenty percent, which is much better.

If your outstanding balance occupies seventy percent or more of your total credit line, it is viewed negatively by the credit bureaus. If the ratio is in the range of thirty to seventy percent, it is doing little or no harm to your credit score; however, it certainly is not helping your credit score. Bring your debt to less than thirty percent of your total available credit, and your FICO score will very likely improve. Getting balances and, therefore, debt to credit ratios down to zero is clearly a desirable goal. It is important to remember, though, that unused credit will not help your credit score. We will explore that topic a bit later.

Length of Credit History

Fifteen percent of your FICO score is based on how long you have had some type of credit. The perception is that someone who has owned a credit card for twenty years is more likely to be responsible and credit worthy than a young person right out of high school who has the same credit card. Although this is true generally, it is certainly not always the case; that is why it is weighted significantly less than payment history and the debt to credit ratio.

New Credit

If you have one credit card for ten years, and then you apply for and receive three more credit cards, expect your credit score to come down a bit. A long-established credit account is considered more stable than a new account. Of course, how your credit score reacts to new credit is also affected by other factors. A new card will increase your total credit line, thereby reducing your debt to credit ratio. An old credit account with a poor payment history is worse than a new account in good standing. All things being equal, new credit is not bad, but old credit is very good. New credit accounts for ten percent of your FICO score.

Unused credit is considered very much like new credit. If you can use a credit card every month, and pay off the balance in full every month, you will see your credit score increase steadily. This is difficult for many people, because of the temptation to overuse the credit card. Responsibility and restraint are critical when using this technique. Remember that, even though unused credit is not very good, it is not at all bad; overused credit is.

Types of Credit Used

The remaining ten percent of your credit score is based on what type of credit you have used. A retail store credit card is not very good. Too many of them could be bad for your credit score, in fact. Small loans, if paid off in a timely manner, have a positive effect. Major credit cards are even better. Big ticket items like auto loans and home mortgages are very good, once again if you make the payments on time.

These five areas are the basis for your FICO score. Armed with this knowledge, you are better equipped to make the changes necessary to improve your credit score. An overwhelming majority of lenders will use your FICO score when considering your application. Put yourself in position to get the best possible deal. Read this article again, and then get started!

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.