Tips and Advice On How To Raise and Improve Your FICO Credit Score
Published 12/18/07 (Modified 3/8/11)
If you're like most consumers, you will probably need to apply for jobs or take out loans to buy a car or a house sometime in your life. What do these things have in common? They all may require that you have a decent credit score to reasonably qualify.
Currently, the most uniformly and commonly used credit scoring system is the FICO score, developed by the Fair Isaac Corporation. The competing credit bureaus have come up with their own scoring systems with various names including VantageScore and Plus score. However, they are all imitators at best and not universally used or recognized by lenders and creditors. There's a reason why many refer to these other scores as "FAKO" scores. The FICO score is still the most widely used method. If you want to compare apples with apples, then it's best to keep your historical credit scores consistent and stick with the FICO. That's the only credit score I really care about.
Many employers today use credit scores to initially gauge prospective job applicants. Even rental apartments frequently run credit checks to make sure future tenants have a history of making good on credit payments. Credit lenders use people's FICO scores to determine whether the person gets approved for credit, how quickly they get approved for credit, the extent of the credit limit, and what kind of terms they get. Those with lower credit scores tend to get stuck with terms that demand higher interest payments and stricter down payment requirements. These days, your FICO score is almost becoming a reflection of your financial trustworthiness so it's in your best interest to keep periodic tabs on your credit score changes and credit report activity.
Not everyone lives a financially perfect life and we've all made financial mistakes or have had unintentional credit difficulty in the past or even currently. Some people like myself even voluntarily subject our FICO credit scores to punishment so we can can take advantage of free interest money generated by no balance transfer fee cards. Either way, it takes time to recover from major credit hits and lapses.
However There Are Several Things You Can Do To Better Understand and Improve Your Credit Score Situation:
1) Check Your Credit Report and Credit Score Regularly - Knowledge is power. It's important and wise to check your free credit report and score regularly and know where you stand in the eyes of creditors. Having a stellar FICO credit score isn't as immediately important if you're still many months or years away from needing a major loan for a house or car, but it still affects your chances for things like jobs and credit cards.Be careful of some websites that purport to offer free or easy to request credit reports. Sometimes requesting from these companies will lead to hard credit pulls that may hurt and lower your credit score - essentially the credit bureaus think you are asking to borrow money and the creditor is checking your credit. I recommend sticking with more reputable sites that offer free credit scores, like MyFICO which I currently use to track my credit situation.
2) Don't Cancel Credit Card Accounts - Many people mistakenly think that if they cancel their credit card accounts, that it will have a positive effect on their credit score. This is incorrect and in fact, canceling older accounts may actually hurt your score. The FICO score relies heavily on the average age of your credit accounts to calculate your credit worthiness score. The longer a particular credit account has been around, the more beneficial its presence will have on your credit score.The other key component of the FICO score is your total credit utilization ratio, which is the total amount you currently owe on all of your revolving credit cards divided by the total credit limit available to you. Closing an unused credit card reduces the amount of credit available to you, making it seem like you are closer to maxing out your credit cards. Once the cards have been issued and activated, the credit ding's already been made so canceling thereafter won't help your score. Try to store the cards away in a safe place if you don't use them, and resist the temptation to cancel if you can.
3) If You Must Cancel, Don't Close Old Accounts But Start With Newer Cards First - Sometimes canceling credit accounts is the only option. If you are having extreme difficulty managing credit and find the temptation utterly irresistible, perhaps canceling a few cards is your best path to a more secure financial future. Consumers frequently seek to cancel their higher interest rate cards first, but in terms of your credit score, you are better off canceling your newer cards first, even if they have the lower interest rates.
4) Pay Down Your Total Debt and Lower Your Overall Credit Usage Ratio - Paying off the minimum payment required on time is important but it's important to keep your total utilization ratio as low as possible, preferably under 30 percent. Since a large FICO credit score component is your total credit utilization ratio, try to lower your usage by either paying off your outstanding debt or by calling your credit card company and requesting a credit limit increase.
5) Resist the In-Store Temptation To Open Credit Accounts - I've written about the dangers of applying for department store credit cards. Each time you apply for one, the resulting hard credit inquiry will hurt your FICO credit score. The one time retail discount you'll get isn't worth the credit hassle.
6) Be Aware Of Credit Inquiries That Will Affect Your Credit Score - Frequent hard credit checks by creditors will negatively affect your score, but soft checks made by you will not. Always make sure you are aware of what type of inquiry is being made when you request your credit report or score - whether it is a hard credit pull or a soft pull. Try to keep the frequency of hard credit inquiries as low as possible, but if you need credit, it's more beneficial to request them all within a short span. A rapid succession of inquiries made by credit institutions like banks, credit card companies, or auto loan financing companies within a short period of time (under a 1-2 week window) will usually be considered as one credit ding.