In the United States, one of the most common discussions amongst its people would be related to credit scoring. Reason behind this is because the score achieved by any consumer would greatly affect the amount of mortgage, loans and many other financial related services.
To put it simply, a credit score is similar to a report card (I know, we have all been through that) where you would get a good nagging for something low and reward for a high score.
Contrary to what many people believe, there is no one universal way of categorizing credit score where the last time you took an extra 5 pennies from the cashier would be recorded on your credit score.
There is however, a widely used well known credit score in the United States, commonly known as FICO or Fair Isaac Corporation. FICO score basically indicates the likelihood of a person to default a loan and this is a commonly adopted tool by most consumers banking and credit industry.
Before going into the discussion on how FICO rating may be improved, it is worth to have a rough idea on what FICE rating is based on.
Basically, FICO rating is separated into a few statistical components where these components are made up from: -
- 35% - punctuality of payment in the past
- 30% - the amount of debt, expressed as the ratio of current revolving debt (credit card balances and others) to total available revolving credit (credit limits)
- 15% - length of credit history
- 10% - types of credit used (installment, revolving or consumer finance)
- 10% - recent search for credit and/or amount of credit obtained recently.
The first step to improving a FICO rating is to get a copy of your own credit report. This can be attained from Equifax and Fair Isaac, TransUnion or Experian.
After that, brace yourself for the agony (or joy if you're an accountant) of going through all the numbers and making sure everything adds up to the best of your knowledge.
Reason is because if something is wrong in the report, it's best to get them corrected because it can take up to months to get a proper correction.
Secondly, if you have serious credit car debt where most of your card balances are close to the credit limit, it's best if you pay them off as soon as possible.
The banks and lenders prefer a large gap between a credit card balance and the credit limit, approximately to a ratio of 40% between balance/limit. Paying off any excess credit card debt would definitely increase the FICO score as it takes up 30% of the FICO score.
Next, it is equally important for you to pay off your debt on time. Despite being able to pay off your debt, it would not go down well in your FICO score if you do not pay your debt on time and every time.
The punctuality of your payment takes up 35% of your score and it is important to know that paying your debt on time now is outweighs the fact that you paid your debt on time 3 years ago.
It is always important to maintain your longest standing account. Reasoning behind this is because the longer you have your financial history established; the easier it is for the creditors or banks to know how reliable your FICO score are.
For example, even if you score a relatively high score, if you credit history is just 5 years as compared to an average rating with a credit history of 30 years, the person with the longer credit history would possibly acquire a larger amount of loan or a lower repayable interest rate.
All in all, it's a not nuclear physics when it comes to raising your FICO score. All it takes is for you to lower your credit card debt, pay your bills on time and keep track of where you are heading in your spending, mortgage and loans. This is not too tough now, is it?