Quick and Easy Ways To Improve Your FICO Score

It used to be that “humans” decided your credit worthiness. For example, you knew your banker by name and your handshake was all the collateral you needed. Those days are long gone. Now a set of numbers - your FICO score - decides your credit worthiness and your banker may be thousands of miles away.

Although there are several credit models, the most commonly used is FICO, based on a model created by Fair, Isaac Company. Their consumer website is myfico.com, and you can find information about the FICO credit scores there.

Your FICO credit score controls your interest rate and how much credit a lender will give you. So taking care of your score, and keeping your credit clean will save you money.

Preserving your FICO score, and improving it, is not difficult, but it may take time. Despite the books, courses and consultants offering to help you improve your credit score, only 3 basic steps come into play. Here are the 3 steps everyone must use to earn, preserve and improve their score - based on three credit examples.

Step One: Obtain a Credit History

There are many reasons you may have no credit history. Maybe you’re just starting out, maybe you pay cash for everything and have never needed a loan. Anyway, if you have no credit history, your FICO score is likely to be low.

The easiest way to raise your score is to get a small loan, and pay it off on time. In general, installment loans carry more credibility than credit cards. In other words, you will improve your credit score faster if you buy goods with an installment loan, rather than getting a credit card.

Another way to earn a better credit history is to take $1000 and open a 6-month CD account at a financial institution. Now, get an installment loan for $1000, using that CD as collateral. Now, here’s the trick. Take the $1000 loan, and open another 6-month CD account at another institution. Take another loan for the $1000 at the second institution. Do this one more time.

Now what you have is 3 loans. Pay the minimum payment for 6 months. In the last month, cash out your CDs and pay the loans off. You now have a credit history, and did not go into long-term debt to get it.

Step Two: Preserve Your Good Credit History

Keep a stable source of income, pay your bills on time and avoid high credit card debt.

Here’s more ideas to keep your FICO score as high as possible. First, don’t close your old accounts. The credit available verses credit used determines a major part of your score. Closing old accounts can lower this part of your score, because doing this narrows your ratio. Second, paying off your credit cards every month is good money management, but you may be able to improve in this area.

Here’s the scenario: you have a $2000 credit card. Every month, you charge about $1800 to that card. And, every month you pay it off. But here’s what happens - your credit card company reports your credit information monthly to FICO. If they report it before you pay off your card, it looks like you carry a balance on your credit card every month.

You may find your FICO score improves if you pay off your credit card at a different time of the month.

Step Three: Repair Your Poor Credit History

For whatever reason, if you have a poor credit history, there are actions you can take to improve your score. Some of them take time, and you will probably do better by talking to a credit counselor. Because they can help repair your credit history and help eliminate what caused that poor credit history in the first place.

The most heavily weighted part of your score is your payment history. The first action to take in starting to repair your credit history is to pay your bills on time. The mortgage is the most important, followed by installment loans, and finally credit cards.

How you use credit is the next largest portion of you FICO score. The fastest way to improve this is to pay down your installment loans and credit cards.

One final point to look for is errors in your credit report. Get a copy of your credit report from all three primary agencies, and look at all the entries. You can find the agencies here: experian.com, equifax.com, and transunion.com.

If there are any errors, start having them removed. Call your creditors - sometimes they will remove negative information. If not, you have a right to have an explanation added to your credit report.

Your FICO score is an important part of your financial life, and using these strategies may help improve your FICO score. Before making any drastic changes to your finances, consult with a financial planner.

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