How to Improve Your Credit Score

Ok so you know whats on your credit report right? If not, check out my post Credit Check-up. Now lets talk about your credit score. A credit score is a number assigned to individuals by one of the credit reporting bureaus which informs lenders about how much of a risk one poses as a borrower. There are three credit reporting bureaus: TransUnion, Experian and Equifax. Whenever you establish a credit account such as a mortgage, auto loan or credit card; the institution who opened the account sends the information to the agencies.

NOTE: Lenders may not report information to all three credit bureaus which can result in widely different scores from one agency to the next.

The agencies compile information relating to your credit accounts. Data such as balance and payment history is saved and put into an algorithm which assigns each individual a FICO score. Each agency uses the FICO formula for assigning a credit score but have a different range of scores. For example: TransUnion’s score range is 300- 850, Experian is 360-840 and Equifax is 280- 850. Lenders may use one or more of these scores to determine whether or not to extend you credit and what interest rate they will charge. There are other areas in life affected by credit score. For instance, many employers are now pulling applicants credit score and using it to make hiring decisions. The point is: your credit score is important.

We have established how credit scores are created and why they are important. You may be wondering what your credit score is. If you are, great! That means you care. There are  many places to get a credit score. However, they are not all equal. Many companies have created their own “score” which are NOT legitimate FICO scores and not affiliated with any of the three credit bureaus. There may be some value to the scores but they are not what companies are looking at for credit decisions. I highly recommend getting your actual FICO score from myFICO.com. Before my credit score was as good as it is today, I subscribed to myFico monthly because I wanted to see how the changes I was making to improve my credit, changed my score from month to month. You can also purchase a plan to get your credit report from one, two or all three of the bureaus each month.

Once you know your credit score, its time to improve it! There are five factors which determine credit score. Not surprisingly the biggest factor is payment history (35%). If you are paying your debts as agreed (I.E. not making payments late or missing them all together) your credit score will be affected positively. Nothing else you do will affect your credit score as much. The next largest factor is amount owed (30%). This element takes into consideration the total amount you owe to creditors, as well as your utilization of revolving credit. Simply put, how much of your credit card line of credit or home equity line of credit have you actually borrowed. Owing $100 on a credit card with a $1000 line is far better than owing $900. Next is length of credit history (15%). This one is simple. The longer you have had a credit account establish the better. This is why it is almost never a good idea to close old credit cards. If you have a card that you don’t want to use, just put it in a safe place and don’t use it. Closing the account can certainly affect your credit score negatively. New credit and credit mix affect your score the same (10%). Having too much new credit is bad for your score. Opening new credit accounts may temporarily lower your score. Having a good credit mix helps your score. A healthy mix of revolving credit (like credit cards), installment loans (like an auto loan) and a mortgage will boost your credit.

 

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