Boost Your FICO Credit Score

2006-05-31

It is the one number that really dictates just about everything in your budget. But it's the only number that is not listed on a written budget. It's your FICO credit score. It tells lenders, utility companies, and even potential employers about your spending habits and how reliable you are with your money.

Your FICO credit score is a numerical summary of how much money you owe and how promptly you pay your bills and ranges from 300 to 850. There are only about 13% of consumers that have reached a score of 800 or above. The median score in the United States is 678 – which in many lenders eyes is only considered a C grade. A rise in your FICO credit score could save you thousands of dollars in high interest charges.

For example, your home is your biggest asset and - for most people - their biggest debt. Borrowers with a FICO credit score of 760 or higher qualified for an interest rate of around 5.8% on a 30 year fixed mortgage. But borrowers with a score around 630 carried an interest rate around 7.8%. When we enter these rates into our mortgage calculator for a $250,000 home, we find that equates to a monthly savings of $264.07 per month or $3168.84 a year. And that is only your mortgage. Think about how that affects your high interest credit cards and personal loans. So what can you do to raise your score? Let’s explore what makes up your score.

The number one way to improve your FICO credit score is really quite simple – pay your bills on time. Your payment history accounts for about 33% of your score. The later you pay the more points you lose. Negative items will affect your score for a period of seven years, but as time passes the older the item the less impact it will have.

The length of your credit history accounts for about 15% of your score. Don’t try to go out and buy everything you have at one time on credit. Obtaining new credit in a short time span will hurt your score and lowers the average age of all your accounts. The number of new accounts account for about 10% of your score and by opening too many accounts in a short time period triggers a loss of points in your FICO score.

The type of credit you use also has an impact on your credit score. The experience you have with revolving credit such as credit cards show how you control your charges. This carries more weight than an auto loan or mortgage where you have fixed installment payments. There is also something called the credit utilization ratio. This ratio is the balance you carry on credit cards verses the high credit balances. The target credit utilization ratio is 25% or in other words if you have a high credit limit of $10,000 on your cards your balance should not exceed $2500.

Can closing old accounts help? There is no right or wrong answer here. It really depends on your personal situation. Closing old accounts could actually hurt your score. You see when you payoff an account and close it you are taking that account out of your credit utilization ratio. For example let’s say you have three credit cards – one with a $5000 limit and a $4000 balance, one with a $2000 limit and a $1000 balance, and one with a $3000 limit with a $1000 balance. Your total credit limit is $10,000 with a balance of $6000 for a 60% CUR. If you had $2000 and decided to pay off and close the smaller accounts and kept your larger limit card, you would actually end up with a $5000 credit limit with a $4000 balance for a CUR of 80%. In this scenario you would actually be worse off with regards to your credit score. But, if you paid all three down and kept the accounts open your CUR would be 40% which is a more favorable situation for your FICO score.

Now, we are not saying not to close your accounts. In some cases you may be better off taking to credit score hit temporarily if it means parting with department store or other high interest cards. If you do choose to close the accounts, don’t go back and apply for new accounts in the first few months. Remember the average account age discussed earlier? You are then trading an old established account for a new one which lowers the average age for all your accounts.

If you have black marks on your credit file, clean up your act and try to get things back in a more manageable position. Keep paying your bills and get your credit utilization ration in check. You can get a grip and boost your FICO credit score, it will just take some time.

Related Articles:
» The Good and The Bad about Your Credit Score
» The Lowdown on Gas Rebate Credit Cards
» Paving The Way To Perfect Credit

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