How to improve your credit score

The foremost credit score in the US is used by the Fair Isaac Corporation, or FICO. The credit score ranges from a low of 300 to a high of 850. FICO claims that the current median score is about 720, meaning 50% of people have a score lower, and 50% have a score higher than 720. If your score is 620 or lower, it is considered “subprime,” and lenders will me more wary of giving you a loan. The most important thing to know about your score, though, is that it is not constant. There are many things you can do to improve your score, simply by knowing what factors are involved in the scoring process.

Now, FICO has kept the exact formula for finding your credit score a secret (just like Coca-Cola and other popular products have kept their formulae top secret). However, to show they are not discriminating by any factor other than your use of credit, FICO has disclosed the main factors. The largest component, roughly 35%, is your payment history. If you have late payments on your mortgage, credit card bill, or any other loan, your score will drop. Therefore, the most effective way to raise your score is to simply make payments on time.

30% of your credit score deals with credit utilization, or how much debt you have compared to your revolving credit limit. In this instance, if you have a high balance on your credit cards, your FICO score will be damaged. With a revolving debt, such as a credit card, the entire balance does not have to be paid back in full every month. You have a minimum monthly payment that you must make. To improve your credit score, you should consider paying more than the minimum for a few months or so. This way, the ratio of debt to credit limit will drop, and having more available credit looks good to lenders.

15% of your credit score is the length of your credit history. Therefore, if you are new to credit, it will take a while to boost your score. But if you use it wisely, you may establish a good history. You don’t want to close an account that you’ve had for a while, especially if you have done everything right with it. If your oldest account has an outstanding balance, work to get this account healthier.

10% deals with different types of credit used. If you have student loans, credit cards, and a mortgage (and you are making timely payments), your score will be higher than someone who just has credit cards. Therefore, if you are ready to move up from renting, you should try to get a mortgage for a home. If you want to further your education, you can try for a master’s degree in graduate school. But don’t forget that, once you have to pay the loan back, make the payments on time!

The final 10% deals with recent credit inquiries. You should not be looking for new credit if you have outstanding debt because this will hurt your score. Remember that 35% of your score deals with your payment history. You might have a slight increase in your score if you obtain a new type of credit, but never forget that the most immediate way to improve your FICO score is making your payments on time.

David Pilley

David Pilley

David Pilley is a May 2010 graduate of the University of North Carolina at Chapel Hill, with a B.A. in communication studies and a creative writing minor. He is a native of Raleigh, North Carolina.

He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.

Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.

In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.
David Pilley

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