Credit Score: How can I improve it?

Credit Score: How can I improve it?think credit

A FICO credit score is based on your credit history and indicates whether you are a good credit risk or not. This credit score is very important when buying a home in Tigard and is increasingly being used in other areas, such as; employee hiring, insurance quotes, and rental applications. It is important to understand your score and how to properly manage your spending and payment patterns to keep this score as high as you can.

Most often, FICO credit scores, which range from a low of 300 to a perfect 850, help lenders determine if you qualify for a mortgage and how high of an interest rate you will be paying. The higher your credit score is, the lower the interest rate on a loan will be. FICO credit scores are produced by software developed by Fair, Isaac and Company (FICO) and are provided to lenders by the 3 major credit bureaus: Equifax, Experian and TransUnion.

What a FICO credit score considers.  

Payment history  – 35% of your score

The first thing a lender would want to know is if you pay your bills on time. This is one of the most important factors in a credit score. The worst thing you can do is be seriously late, 30 days or more, in paying. The best way to bring up your score is to start paying on time.

Amount of debt owed  – 30%  of your score

Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended, and is more likely to make payments late or not at all. Part of the science of scoring is determining how much is too much for a given credit profile. Stay at 30% or below of your credit limit and do not consolidate all debt to one credit card that will end up with a high balance. Lenders look at this factor to see if you can control yourself.

Length of credit history  – 15% of your score

In general, a longer credit history will increase your credit score. However, even people who have not been using credit long may get higher scores, depending on how the rest of the credit report looks. Long term accounts with a history of regular payments helps your credit score.

New credit  – 10% of your score

Take out new credit only when you need it. Resist the urge to sign up for department store accounts, just to save 10 or 15 percent on the purchase. This can adversely affect your score and limit your access to mortgage money at the best possible rates. Research shows that opening several accounts in a short period of time does represent greater risk, especially for people who do not have a long-established credit history. Several inquiries from lenders will lower your score. FICO scores do a good job of distinguishing between a search for new credit accounts and rate shopping, which is generally not associated with higher risk. If you plan on getting a home loan, do not open any new accounts. This will lower your credit score. Do not buy any new furniture until after your loan closes.

Types of credit in use  – 10% of your score

Your score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not a good idea to open credit accounts you don’t intend to use.

The higher your FICO® score, the less you pay to buy on credit – no matter whether you’re getting a home loan, cell phone, a car loan, or signing up for credit cards.

 How do I repair my FICO score?

For starters, get copies of your credit report from all three credit bureaus: Equifax, 800-685-1111, http://www.equifax.com/; Experian, 866-200-6020, http://www.experian.com/; TransUnion, 800-888-4213, http://www.transunion.com/.

Please note that these credit bureaus may have their own credit score for you and it may be different from the FICO score that most lenders use.

Consumers can order free copies of their credit report every 12 months at http://www.annualcreditreport.com/. The FICO score costs extra, from $6 – $8. Correct any errors found on these reports. You can easily do it yourself. You do not want to pay anyone to do it.

Implement this plan to reduce your debt:

  1. Stop adding to your debt. Stop using credit cards. Use cash until you get things under control.
  2. Make a list of all your credit card and loan balances, minimum payments, and interest rate.
  3. Continue making the minimum payments on all the cards/loans.
  4. Some experts say to pay off the cards/loans with the highest interest rate first. Others say to pay off the cards/loans with the smallest balance first. I agree with the second philosophy, even though it might cost you an extra couple bucks a month. You get a mental boost when you see your plan progress quickly.
  5. As you pay off one card/loan, now you have a little bit extra to add to the next card/loan.

 Payment History Tips

  • Pay your bills on time.
    Delinquent payments and collections can have a major negative impact on your score.
  • If you have missed payments, get current and stay current.
    The longer you pay your bills on time, the better your 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.
  • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
    This won’t improve your 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

  • The most important first step to improve your credit score is to quit adding to your credit card debt.
  • Carry cash for small purchases and leave you credit cards home to avoid using them impulsively.
  • Keep balances low on credit cards and other “revolving credit”.
    High outstanding debt can affect a score.
  • Pay off debt rather than moving it around.
    The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
  • Don’t close unused credit cards as a short-term strategy to raise your score, especially if they have a long and positive history. If you have more than 6 cards, which is too many if you are having credit problems, pay off and close the newest ones .
  • Don’t open a number of new credit cards that you don’t need, just to increase your available credit.
    This approach could backfire and actually lower 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.
  • Re-establish your credit history if you have had problems.
    Opening new accounts responsibly and paying them off on time will raise your score in the long term.
  • Note that it’s OK to request and check your own credit report.
    This 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

  • Apply for and open new credit accounts only as needed.
    Don’t open accounts just to have a better credit mix – it probably won’t raise your score.
  • Have credit cards – but manage them responsibly.
    In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
  • 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 in the score.

What is Not In Your Score                                     

  • Your race, color, religion, national origin, sex and marital status.
    US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
  • Your age.
    Other types of scores may consider your age, but FICO scores don’t.
  • Your salary, occupation, title, employer, date employed or employment history.
    Lenders may consider this information, however, as may other types of scores.
  • Where you live.
  • Any interest rate being charged on a particular credit card or other account.
  • Any items reported as child/family support obligations or rental agreements.
  • Certain types of inquiries (requests for your credit report).
    The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
  • Any information not found in your credit report.
  • Any information that is not proven to be predictive of future credit performance.
  • Whether or not you are participating in credit counseling of any kind.

To stop receiving unsolicited, pre-approved credit card offers, call 1-888-5OPTOUT or visit www.optoutprescreen.com.

For a wealth of information, go to http://www.myfico.com/

I am ready to help you buy a home in Tigard, Oregon. If you have any questions, give me a call. You will get straight answers with no sales pressure.

Call Wayne at 503-891-0795 or email at waynepruner@oregonfirst.com