Like most Americans, I’ve experienced financial difficulties over the past 10 years. It resulted in missed credit card payments, failing to pay medical bills and maxing loans in order to live through the 2008 recession. Obviously that negatively impacted my credit score leaving me to ask, “What am I supposed to do next?”
The answer: I needed to learn how the score works, what I can do to change it and where I can find this information for free. First, lets review specific actions you can do to increase your score.
1. Paying bills on time: Any late payments or collections will have a large impact on the three FICO scores.
2. Don’t apply for credit frequently: When applying for a credit card, a hard hit (or inquiry) will occur. This is reflected on the report, lowering the score further by 3-5 points.
3. Ask your credit card company to increases all credit limits then start to reduce your balances below 33%: Your debt to income ratio will be more attractive to lenders when you have a low balance owed. The goal is to keep your balance under 33%. Anything higher will negatively impact your score.
4. Obtain enough credit to establish a credit history: Don’t wait 6 months before you buy a home to start this process – It takes time. Even if you don’t use them, keep your credit cards open to show past history. Click Here to learn more about credit card history.
I then wanted to know, what will these actions actually impact and why am I doing them? Below FICOSCORE explains what components your score consists of:
1. Payment History: 35% of your score is determined by payment histories on credit accounts, with recent history weighted slightly more heavily than the distant past.
2. Debt utilization: 30% is based on the amount of debt outstanding with all creditors as a percentage of the total available credit limit.
3. Credit history: 15% is produced on the basis of how long the borrower has been a credit user (a longer history is better if there have always been timely payments).
4. Recent credit searches: 10% is comprised of very recent history and whether the borrower has been actively seeking (and getting) loans or credit lines in the past months.
5. Types of credit: 10% is calculated from the mix of credit held, including car loans, leases, mortgages, credit cards, etc.
Now, what’s your first step to increasing your score? Contact all three major national credit bureaus to see if anything negative is reported then take action.
· Equifax: www.equifax.com
· Experian: www.experian.com
· TransUnion: www.transunion.com
Did you know:
If you do have anything impacting your score the report will show who took action against you – including their name, address, and telephone number.
Sources: IFREC, CDC, FICOSCORE.COM
*Legal counsel is always recommended – this advice comes from multiple sources including IFREC and the CDC. In addition, this has been written by a licensed REALTOR.