Improving Your Credit Score

In order to improve your score, it helps to first understand what it is.

When you apply for credit whether for a credit card, a business loan, or a mortgage, lenders want to know with certainty what risk they face when considering who to lend to. FICO scores are the premier credit scores most lenders use to determine any credit risk.

You have three FICO scores, one for each of the three credit bureaus:

1. Experian
2. TransUnion
3. Equifax

Each score is based on information the credit bureau tracks a profile about you. As this information changes, your credit score will change good or bad. Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time.

For your three FICO scores to be calculated, each of your three credit reports must contain at least one account which has been open for a minimum of six months. In addition, each report must contain a minimum of one account that has been updated in the previous six months. This ensures that there is adequate information and enough recent information in your report on which to base a FICO score with all three credit bureaus.

About FICO scores

Credit bureau scores are usually referred to as FICO scores because most credit bureau scores, used in the U.S., are produced from software developed by Fair Isaac and Company. FICO scores are then provided to lenders (credit card agencies, banks, credit unions, etc.) by these three major credit reporting agencies.

FICO scores also provide any lending institutions their most trusted yardstick as to possible future risk, based solely on your credit report data. The higher the score, the lower the risk. In short, your FICO score is a major factor in establishing trust, over many others.

While many lenders use FICO scores to help them make lending decisions, each lender has their own strategy, including the level of risk it finds acceptable for a given credit product. There is no single minimum score used by all lenders. But there are many additional factors that lenders use to determine your actual interest rates.

In general, when people talk about "your score", they are referring specifically to your current FICO score.

Ways To Improve Your FICO Score

Raising your score can be compared to living a healthy lifestyle. It takes time to rebound from a life of bad diets and no exercise. There is not necessarily a quick road back to good health, nor good credit.

In fact, quick-fix attempts can be damaging and even add time to the process. The best advice that can be given is to build your credit responsibly and over time. Long-term consistency is your key.

This is a guideline by just following these tips and raising your score.

Payment History Musts

• Pay all your bills when they are due. NEVER BE LATE. Delinquent payments and any collections will generate a negative impact on your score.
• Missed some payments? Get current. Stay current. When you pay your bills on time over a long period of time, the better your score.
• Paying off a collection account will not remove it from your credit report. It will stay on your report for seven years. So do not let any bill go to collections.
• Having trouble making ends meet? Immediately contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but you must begin to manage your credit and pay on time. As a result, your score will get improve over time.

Vital Tips on Amounts Owed

• Keep balances low on credit cards. High outstanding debt will greatly affect your score. Try to keep your balance below 50% of the credit available on each card. For instance, if you have a credit card with a $10,000 limit, do not charge more than $4,999. This is true for each card that you posses.
• Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
• Don't close unused credit cards as a short-term strategy to raise your score. Having available, unused credit at your disposal actually helps your credit score.
• Don't open a number of new credit cards that you don't need. This approach can backfire and actually lower score.

Your Credit History

• Have you been managing your credit for a short time? If 'yes' then do not open a lot of new accounts too rapidly. New accounts will lower your average account age. This will have a more substantial effect on your score if you don't have a lot of other credit information. Rapid account buildup can look risky to lenders if you are a new credit user.

New Credit Tips

• You must re-establish your credit history, if you have had past bad credit. Opening new accounts responsibly and paying them off on time will raise your score in the long term.
• It's OK to request and check your own credit report. This will not affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

• Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit. It is not an effective credit-building strategy.
• Have credit cards - but handle them with responsibility. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
• Note that closing an account does not remove it from your credit report. A closed account will still show up on your credit report, and may be considered in your overall score.

There is no attempt here to make the situation sound dire. There are many ways to improve your score. For more information, I would recommend contacting a mortgage professional.

Best wishes, Shel


Sheldon Goldberg
Broker, DREAM REALTY
727-512-6030