FICO, the most common credit score, reduces your credit history to a three-digit number, which instantly informs a lender if you’re creditworthy. Lenders also use a FICO score to determine how much you can borrow and the terms of the loan. Lenders use FICO scores to determine if they should offer you a credit card . The score also helps determine your credit card interest rate. Hence, it is critical to constantly improve your credit score.
FICO scores range from 300 to 850; typically you need 760 or higher to receive the lowest interest rates on loans. Yourchanges whenever your creditors report new information such as your updated credit card balance.
Created by the Fair, Isaac Corporation, FICO scores and similar scores utilized by other credit reporting services base their scores on factors including:
· Payment history
· How much you owe compared to how much you originally borrowed
· What type of credit you have
· New credit applications
· How long you’ve had credit
If you don’t have a serious black mark on your credit reports, such as a foreclosure or a bankruptcy, you can improve your credit score in one or two months.
Tips To Improve Your Credit Score
- Typically paying down your credit card balances is the fastest way to improve your credit score. Approximately one-third of your credit score is based on your debt-to-credit ratio which is the amount of available debt you’re using divided by the total amount of available credit. How much you charged on credit cards is what counts to credit bureaus, even if you pay your balance in full every month.
- Keep your unused credit card accounts as they help to improve your credit score. Cancelling a card harms your debt-to-credit ratio. Canceling a credit card removes the credit limit on that card from you’re available credit which lowers your debt-to-credit ratio which decreases your credit score.
- Errors do occur on credit reports. Read your credit report once a year at AnnualCreditReport.com. Check to see if late payments, credit limits or collection items are incorrectly included in your accounts. Correcting any mistakes helps improve your credit score, particularly if you report the errors to the credit bureau online.
- Always pay your bills on time; delinquencies have a substantial negative effect on your credit score. If one of your accounts is sent to a collection agency it will leave a blemish on your credit report for up to seven years. Paying bills regularly will help you improve your credit score
- Never max out credit cards. Maxing out credit cards can lower your credit score 10 to 45 points. Experts suggest using 25 percent or less of your available credit. Instead of maximizing out a credit card, have two credit cards with balances at or below 25 percent of your limit and that can help a great deal to improve your credit score
- If you have a bad credit history, consider opening new credit accounts; paying them on time increases your credit score in the long term. Increasing your available credit improves your debt-to-credit ratio and thereby improve your credit score
- Since your credit score is reviewed when you shop for a loan, it’s best to submit applications to lenders within a two-week timeframe. Numerous credit inquiries may decrease your score, however a cluster of credit inquiries for a particular type of loan, such as a home loan, within a short time frame typically won’t decrease your credit score.
- Keeping a couple of your oldest credit cards open shows a long credit history. Older, established accounts increase your credit rating. A long credit history increases your credit score. Occasionally use older credit cards so the credit card issuers don’t stop reporting your information to the credit bureaus.
- Pay down your balances on credit cards. Paying down credit lines during a two month period substantially boosts a credit score. Amounts owed accounts for 30 percent of a FICO score.
- In the end, use cash and not credit until it is really necessary. We humans are creatures of habit and once we get used to credit, we tend to overdo it thereby increasing chances of a bad credit score
Briana Fabbri is the Head of Marketing and also blogs for NetCredit.com, an online personal loan provider. Briana frequently writes about personal lending and credit issues, and holds a degree from the University of Chicago where she also has guest lectured.
Note: Ms. Fabbri and NetCredit do not provide financial advice. Please consult with a qualified financial advisor regarding your individual circumstances.