It used to be that “people” made decisions about your credit worthiness. You knew your banker and your handshake was all the collateral you needed. Those days are long gone, and now a single number – your FICO score – determines your credit worthiness.
We can talk about several ways to review your credit but to keep it simple we are going to focus on the credit model created by Fair, Isaac Company. Better known as FICO.
Your FICO credit score can be used to determine 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.
Getting and improving your credit score is not hard at all, just takes time. Here is a tip or two that will help you improve and increase your score.
FIRST: 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. In any case, if you have no credit history, your FICO score is likely to be low.
The easiest way to raise your score is acquire a loan, and pay it off on time. In general, installment loans are weighted more heavily than credit cards. In other words, you will improve your credit score faster if you buy goods with an installment loan, rather than acquiring a credit card.
Another way to acquire 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.
SECOND: Keep your credit history clean.
Ok…now you have a good history. No major debt…now to keep the FICO as high as you can.
Don’t close your old accounts. One part of your credit score is based on the amount of credit available verses amount of credit used. Closing old accounts can lower this part of your score.
Something to think about. The day of the month you pay off your credit card may have a lot to do with your FICO score. Let?s say 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, but they report it on the 10th of the month…and you pay on the 15th. This would cause the credit agency to see you carry forward a balance every month. Try changing the payment times…just is sure NEVER to pay late.
THIRD: Repair Your Poor Credit History
At some point there is a very good chance you will have something that causes your credit rating to drop. Don’t panic…poor credit can be fixed. Understand however that the process takes time. In some cases you may need to talk to a credit counselor to assure you address the reasons for the drop as well as remove any future habits that may cause it to drop again.
Your credit history is the most important part of your FICO score. You need to start paying your bills on time. The value of your bills is as follows. Mortgage first, followed by installment loans, then credit cards.
The next largest factor on your credit is how you have used it. You can improve it by paying off your credit cards.
When you?re all done with the rest of things…review your credit report. Get one from all the credit agencies. Look for errors and mistakes. Contact them to see if they can remove them or correct the errors.
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 advisor.
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