Credit & How It Works
· FICO® scores are the numerical summary of your credit rating.
· They range from 300-850, higher is better!
· Higher scores can mean lower interest rates.
· FICO® scores are calculated based on your rating in five general categories:
- Payment history - 35%
- Amounts owed - 30%
- Length of credit history - 15%
- New credit - 10%
- Types of credit used - 10%
Improving your FICO® credit score
It's important to note that raising your FICO credit score is a bit like losing weight: it takes time, and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.
Payment History Tips
- Pay your bills on time!
Delinquent payments and collections can have a major negative impact on your FICO score. However, keep in mind that most bills will not be shown as 'late' on your credit report until they are over 30 days past due. If you are behind, make sure to pay within the 30-day period. - If you have missed payments, get current and stay current.
The longer you pay your bills on time, the better your credit score. - Be aware that paying off a collection account will not remove it from your credit report.
It will stay on your report for seven years. Also, if you are applying for a loan soon, it may be best to wait to pay off an old collection account (as updating an old derogatory account, even by paying it off, can hurt your score in the short run). - If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
These steps won't improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.
Amounts Owed Tips
- Keep balances low and credit limits high on credit cards and other revolving debts.
High outstanding debt can adversely affect a credit score. Ideally, you want your credit balances to be 1/3 or less of your high limit. If your balances are over 50% of your credit limit, your score will certainly suffer. - Don't close unused credit cards as a short-term strategy to raise your score.
Length of Credit History Tips
- If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.
New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
New Credit Tips
- Do your rate shopping for a given loan within a focused period of time.
FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you are shopping for a large ticket item like a home mortgage, multiple credit inquires within a 2-4 week period will be counted as only one inquiry. Don't be fooled by uniformed (or intentionally misleading) lenders that tell you not to allow others lenders to pull your credit because it will 'hurt your score.' - Re-establish your credit history if you have had problems.
Opening new accounts responsibly and paying them off on time will raise your credit score over the long term. - Note that it's OK to request and check your own credit report.
This action won't 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
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Have credit cards, but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be viewed as a higher risk than someone who has managed credit cards responsibly.
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Note that closing an account doesn't make it go away.
A closed account will still show up on your credit report, and may be considered by the scoring model.
