It used to be that "people", not computers, made decisions about your credit worthiness. You knew your banker personally and your handshake was all the collateral you needed. Those days are long gone, and now a single number generated by a computer - your FICO score - determines whether you are a credit risk or worthy of credit.
While there are several credit models, the most commonly used is called the FICO score, based on a computer model created by Fair, Isaac Company.
Your credit score is often used to determine your interest rate and how much credit a lender will give you. Taking care of your credit score, and keeping your credit history clean will save you money.
Keeping a good FICO score, or improving it, is not difficult, but it may take time. Here are some strategies to maintain and improve your score, based on three credit situations.
1. Obtain a Credit Report
For various reasons, you may have no credit history. Maybe you're young and just starting out, or maybe you always pay cash for everything and have never needed a loan. In any case, if you have no credit history, your FICO score will most likely be very low.
In this case, an easy way to raise your score is to acquire a loan, and pay it off on time. In general, when calculating your credit score installment loans are weighted more heavily than credit cards. So, you can improve your credit score faster if you buy goods with an installment loan, rather than acquiring a credit card.
Another way to build a better credit record is to take $1000 and open a 6 month CD account at a financial institution. Once you have done so, get an installment loan for $1000, using that CD as collateral. Pay attention now, here's the trick. Take the $1000 funds from the installment loan, and open another 6 month CD account at a different banking institution, and then take another loan for the $1000 at the second institution. Do this one more time.
Now you have three installment loans. Every month pay the minimum payment for the next 6 months. In the sixth month, cash out all of your CDs and pay all three of the loans off. You now have a credit history, but you did not go into long term debt to get it.
2. Maintain Your Good Credit Rating
Great job! You paid your bills on time, and you do not have high credit card debt. Here are some tips to maintain your FICO score as high as possible.
- Don't close your old credit accounts. One component when calculating your credit score the amount of credit available verses amount of credit used. Closing old credit accounts can lower this part of your score.
- Paying off your credit card balances every month is good money management, but you may be able to improve in this area. Here's the scenario: you have a credit card with a limit of $2000. Every month, you charge arounnd $1800 to that card. And, each month you pay it off in full. But here's what happens - your credit card company reports your credit information monthly to the national credit bureaus. If they report on your balance before you pay it off, it looks as if you carry a high balance on your credit card every month. Your FICO score may improve dramatically if you pay off your credit card at a different time of the month.
3. Repair Your Poor Credit History
If you have bad credit, there are things you can do to improve your score. Some of the strategies take time, and you may want to talk to a credit counselor to be sure that you not only improve your credit history, but also eliminate what caused that poor credit history in the first place.
The most heavily weighted element of your score is based on your payment history. The first thing to do to start repairing your credit history is to pay your bills on time each and every month. If you have a mortgage, it is the most important, followed by installment loans, and finally credit cards.
The next most important part of your score is based on how you use credit. The fastest way to improve this is to pay down your credit cards - never use more than one-third of your available credit on any one card.
Finally, look for any errors on your credit report. Order a copy of your credit report from all three of the national credit agencies, and look carefully at all the entries. The agencies are: experian.com, equifax.com, and transunion.com.
If you find any errors, start the process to dispute them. Also, call your creditors - often they will remove negative information.
Your FICO score is a very important part of your financial health, and using these strategies may help improve your FICO score. Before making any drastic changes to your finances, consult with a financial advisor.
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