How Do I Improve My FICO Score?

By Jonathan G. Cameron, CFP®

An important financial concern that we often hear from clients is, “How can I improve my credit score?” Now, I have to give a quick disclaimer that our company, CameronDowning, is not a credit repair or debt consolidation service. Our goal is to arm you with the education you need to establish a strong financial foundation – and this often includes advice on how to raise your credit score.

If you’re considering buying a home, taking out a loan, or you’re getting yourself organized after a season of personal financial challenges, you understand that your credit score may determine what you can and cannot do in life.
The most widely used credit score are FICO scores. FICO is an acronym for the Fair Isaac Corporation. Founded by William Fair and Earl Isaac in the late 1950s, they developed a mathematical algorithm that predicts consumer behavior, resulting in a score. These scores are calculated only with information that can be found on your consumer credit report, which you’ll want to check regularly.

The major reporting bureaus are TransUnion, Experian, and Equifax. FICO scores have a base range of 300 on the low end and 850 on the high end. Every lender has different FICO score qualifications, so if you’re looking to get a business loan or take out a mortgage and your FICO score isn’t the greatest, ask your lender whether you would qualify. What I can tell you is that if you’re in the upper 600s you’re doing OK – – could be better, but if you follow the advice given here it shouldn’t be long before you get to good or excellent credit.

So you want to know – what’s the fastest way to raise my credit score?

Well, there are five categories that the Fair Isaac Corporation looks at when determining your credit score, in order of priority:

  1. 35% of your score is based on your payment history.  The number one thing lenders look for is that you’re paying them on time. Even if you’re carrying a credit card balance and you’re only paying the $30 monthly minimum, make sure you pay that amount. And this makes sense, right? If you were a lender, wouldn’t you want the person to whom you’re lending money to pay you on time? This is a big deal. So be vigilant with your payments and make sure you pay on time, every time. There is a little wiggle room, though. Some credit grantors will report a payment as being on time even if late up to a certain point. Mortgage payments, for example, are often on time even if made up to 30 days late. Check with the individual lender.
  2. 30% of your score is based on credit usage. This is the amount owed relative to the total credit line. The closer you are to maxing out your cards, the worse it is for your score. Do your best to keep your balance well below 50% of your credit line, if not less than 25%. Here’s an example: say you have two credit cards, both with a $2000 credit limit. Your balance is $1800 on each card – or 90% credit usage. You decide to aggressively pay them off, putting all available resources against card #1 until paid off, making the minimum payments on card #2. The better strategy would be to bring both balances below $1000 – 50% of credit usage, and then both below $500 – 25% of credit usage, before paying one completely off.
  3. 15% is the length of your credit history. Good credit history continues to work for you. Don’t necessarily close accounts once they’re paid. You may even want to make an occasional charge, simply to have more on-time payments on your record.
  4. 10% of your FICO score is your mix of credit use. That is, your combination of credit cards debt, retail accounts, installment payments, etc.
  5. Another 10% of your score is based on new credit. Opening one card may not have a big effect, but opening several new accounts in a short time may adversely affect your score in the short term.

These weightings are the ones provided on the Fair Isaac Corporation website.
There are many websites now that claim to offer free credit scores. One we recommend that is truly free is creditkarma.com. They give you a Transunion credit report and credit score updated monthly.

Since your credit report is the only source that FICO pulls from in determining your credit score, you’ll want to make a habit of checking it often for irregularities. What do I mean? With identity theft as rampant as it is, you have to be as vigilant as ever to ensure that your credit score is accurate. Comb through these reports and check for errors. Make sure there isn’t a home address listed that you don’t recognize. Make sure all lines of credit on these reports are yours. If you don’t recognize a credit card or if something is wrong, report it immediately. To access your reports, go to annualcreditreport.com. You are legally entitled to one free report per year per agency. Since there are three reporting agencies, a good strategy is to pull one report every 4 months from one of the reporting agencies. Again, these reports are different than your credit score. TransUnion, Experian, and Equifax are the sources from which your credit score is derived.

One last thing. What do you do if you see an error? Challenge it! The credit bureau reports the information provided by the credit grantor. Mistakes can and do not infrequently happen. Say, for example, you see that a department store has reported an account that you paid on time as having been charged off as a bad debt. You contact the credit bureau – usually online – and place a challenge. They will go to that credit grantor to verify the information. If the grantor cannot verify the information, it comes off your report. Simple as that.

I hope this information is helpful as you try to build up your FICO score.
Please be sure to visit our website at www.cameron-downing.com, where you can see all of our blog posts, our planning packages for one-on-one financial advising sessions, and book an appointment to come see us.

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