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Three Strategies to Improve Your FICO Score
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.
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 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.
Preserving your FICO score, and improving
it, is not difficult, but it may take time. Here are
some tips to maintain and improve your score, based
on three credit situations.
Strategy 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. 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.
Strategy Two: Maintain Your Good Credit
History
Good job - you have paid your bills
on time, and do not have high credit card debt. Here's
some ideas to keep your FICO score as high as possible.
First, 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.
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.
Strategy Three: Repair Your Poor Credit
History
For whatever reason, if you have a poor
credit history, there are things you can do to improve
your score. Some of them take time, and you will probably
be best served by talking to a credit counselor to be
sure that you not only repair your credit history, but
also eliminate what caused that poor credit history
in the first place.
The most heavily weighted part of your
score is based on your payment history. The first thing
to do to start repairing your credit history is to pay
your bills on time. The mortgage is the most important,
followed by installment loans, and finally credit cards.
The next largest portion of your FICO
score is based on how you use credit. The fastest way
to improve this is to pay down your credit cards.
One final thing 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 the process to have them removed. Call your creditors
- sometimes they will remove negative information.
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.
1howto.com
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