Information on how your score is calculated and 21 tips for raising your scores.
Raising Your Credit Scores
“The better the score, the lower the interest rate, and that can save you a ton of money”
–Ed Ojdana, president of Experian Consumer Direct. www.bankrate.com
Are you looking for:
- a loan or mortgage?
- a credit card?
- a new job?
What will be the response to your application? The answer begins with your credit score.
What Is A Credit Score?
A credit score is a number that a company uses to rate your creditworthiness or your level of risk to a lender. Credit Scores canrange from about 300 to 850. A higher number means you are morelikely to pay back a debt.
The most widely used credit score is the FICO score, created by Fair, Isaac and Company.
What Determines Your Credit Score?
Your credit score depends on the information in a credit file about youand on the method used to calculate the score. A credit file ismaintained by a company that collects certain information aboutyou. It sells the information for a profit. This type of companyis commonly called a credit bureau (also called a credit reportingagency, or credit reporting company). There are several differentcredit bureaus and each one has their own file on you. Additionally,there is no single method for calculating a credit score. As aresult, you have a different credit score with each company.
Why Check Your Credit Scores?
Your credit score affects your ability to get a credit card, loan,mortgage, insurance, or even a job. It also affects the terms youcan get and the rates you will pay.
According to FICO, about 40% of the population has a score of 700 orbetter. Depending on a creditor’s guidelines, the differencebetween a 698 and a 701 could mean several thousand dollars differencein interest paid on a mortgage. Interestingly, there seems to be apractical target score. Pat Curry states, “if your score is abovea 720, you’re golden. Improving your score from a 720 to a 740 won’tget you better terms.” (source:www.bankrate.com/brm/news/credit-scoring/20040128a1.asp)
How To Get Your Scores
If you want to know your score, you must purchase it. Each of thethree nationwide credit bureaus will provide you a score that can bepurchased separately or together with a credit report (a statement ofyour credit history):
Equifax: 800-685-1111 www.equifax.com
Experian: 888-397-3742 www.experian.com
TransUnion: 800-916-8800 www.transunion.com.
You can also purchase your FICO score at: www.myfico.com.
Alliance Tip: Be cautious of “credit repair” offers. The FederalTrade Commission has stated, “the truth is, they can’t deliver…Everything a Credit Repair Clinic can do for you legally, you can dofor yourself at little or no cost.”
19 Ways To Raise Your Score
FICO advises that “raising your score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts canbackfire. The best advice is to manage credit responsibly over time.”They offer the following tips on improving your FICO score:
Payment History Tips
- Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.
- If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
- Be aware that paying off a collection account will not remove it fromyour credit report. It will stay on your report for seven years.
- If you are having trouble making ends meet, contact your creditors orsee a legitimate credit counselor. This won’t improve your scoreimmediately, but if you can begin to manage your credit and pay ontime, your score will get better over time.
Amounts Owed Tips
- Keep balances low on credit cards and other “revolving credit.” High outstanding debt can affect a score.
- Pay off debt rather than moving it around. The most effective way toimprove your score in this area is by paying down your revolvingcredit. In fact, owing the same amount but having fewer open accountsmay lower your score.
- Don’t close unused credit cards as a short-term strategy to raise your score.
- Don’t open a number of new credit cards that you don’t need, just toincrease your available credit. This approach could backfire andactually lower your score.
Length of Credit History Tips
If you have been managing credit for a short time, don’t open a lotof new accounts too rapidly. New accounts will lower your averageaccount age, which will have a larger effect on your score if you don’thave a lot of other credit information. Also, rapid account buildup canlook risky if you are a new credit user.
New Credit Tips
- Do your rate shopping for a given loan within a focused period oftime. FICO® scores distinguish between a search for a single loan and asearch for many new credit lines, in part by the length of time overwhich inquiries occur.
- Re-establish your credit history if you have had problems. Openingnew accounts responsibly and paying them off on time will raise yourscore in the long term.
- Note that it’s OK to request and check your own credit report. Thiswon’t affect your score, as long as you order your credit reportdirectly from the credit reporting agency or through an organizationauthorized to provide credit reports to consumers.
Types of Credit Use Tips
- Apply for and open new credit accounts only as needed. Don’t openaccounts just to have a better credit mix – it probably won’t raiseyour score.
- Have credit cards – but manage them responsibly. In general, havingcredit cards and installment loans (and making timely payments) willraise your score. Someone with no credit cards, for example, tends tobe higher risk than someone who has managed credit cards responsibly.
- Note that closing an account doesn’t make it go away. A closedaccount will still show up on your credit report, and may be consideredby the score.
Additional things to do:
- Dispute Errors On Your Credit Reports. Look for things such asduplicate accounts, accounts that don’t belong to you, accounts thatshow a balance that you think you paid off, or payments reported latethat you think were on time. It is up to you to report it to the creditbureau by sending them a credit report dispute. You are responsible forthe accuracy of the information in your credit file, so you shouldcheck your reports at least once a year (perhaps quarterly). Forinformation on checking your reports and filing disputes, see the lastsection below.
- Request that outdated information be deleted. Negative informationmust normally be removed after 7 years (10 years for bankruptcies).
- Check each credit report for missing accounts. A smaller orlocal creditor may not have reported your account information to acredit bureau. If the information is positive, you can ask thebureau to add it to your report (for a fee) although it might not beupdated.
- Ask the creditor or lender what you can do. Because eachcreditor can use a different method for calculating your score, it’sbest to ask the company you’re applying to for advice on what you cando to improve your score.
Finally, be aware that lenders consider other factors in addition toyour score, such as your Debt-to-income ratio, your employment history,the stability of your income, your net worth, length of residence,andyour public record.
To Find Out More
- You can read detailed information about what is and is not included in your credit score at www.myfico.com/crediteducation.
- How To Check Your Credit Reports: www.knowdebt.org/education.php.
- How To Dispute Errors On Your Credit Reports: www.knowdebt.org/education.php.
© 2005 Alliance Credit Counseling.