Let’s take the time to set the record straight first. Your credit score falls between 300 and 850 with an ideal score somewhere in the high 700s. That’s easy. More difficult to grasp are the steps you need to take to actually improve your credit score.
*Gurgle gurgle… SWOOSH!* Enter the Solvency Shark with an in-depth look at the credit score evaluation process and the lessons harvested therefrom. (If only I could program theme music into this section of the article.)
The Fair Isaac Corporation (FICO) has a system for determining your credit score that is the benchmark here in the US, and it’s based on financial information collected over the years. Let’s see how it’s done.
First, these FICO-mancers throw a giant black cauldron over a crackling log fire and then burst out into fits of cackling that can be heard from deep within the dark forest’s canopy. Just kidding – these guys aren’t into the dark arts! But, hey – Halloween is about a month away and the “witch’s brew” analogy works well, so the Solvency Shark will take the bait.
35% of the potion’s ingredients depend on your “payment history,” or how well you’ve paid your creditors over the years. Any late fees, finance charges, or bills that went to collections? That’s scary enough to make even the mole hairs on a witch’s face stand up in fright.
Another 30% of the brew depends on your “debt ratio,” or how much credit is presently available to you. Example: if you’ve charged $7,500 to your credit cards that have an upper limit of $10,000, then ¾ of your credit isn’t available. $2,500 charged – or ¼ of your credit unavailable – looks a lot better. Good witches and wizards always check to see how much room they have left in their credit cauldron.
Next, the FICO-mancers look at how long you’ve had a line of credit and throw that in for 15%. Another 10% goes towards what types of credit you have (e.g. credit cards or home loans) and a final 10% looks to the number of recent credit inquiries on your account. These are the pickled nose hairs of newt, Sasquatch fingernail clippings, and other bits and bobs that the FICO-mancers pop into the potion to season it up and round out its flavor.
You could easily dismiss these percentages as a bunch of nonsensical googly-moogly, but here’s how the Solvency Shark smells it (sharks are best known for their sense of smell – but don’t get me wrong, they have fantastic color vision as well): to improve your FICO credit score quickly, you need to target the areas on which you can make a real and immediate impact.
Let’s take a look at the last three factors that make up your credit score and evaluate our potential impact there. First, the only way to elongate the length of your credit card history is to hold good lines of credit as you age (nevertheless, you can shorten the length of your credit history in an instant by canceling your oldest credit card. Pro tip: don’t do that). Next, if you only have credit cards, you shouldn’t go out and get a home loan just to generate some variety within your types of credit. Finally, credit inquiries are carried out by other people trying to determine your creditworthiness. You don’t have much control over that and should only worry if there are a sizable amount of inquiries in a not-so-sizable amount of time.
But what about the lion’s share of your credit report – your payment history and debt ratio – that form a whopping 65% of your score? These look like prime targets for immediate action.
“But Solvency Shark, my cards are all maxed out! I can’t afford to pay them back,” you complain. Maybe it’s because the Solvency Shark is underwater and the sound waves are being distorted, but all I hear is, “But super-handsome Solvency Shark, I have a really high debt ratio and a sloppy payment history! Whine whine whine you have a rugged jaw line whine whine you are the sleekest sea predator.”
Actually, that was a trick – sound travels more quickly underwater due to less interference, so I heard you loud and clear. We understand – you’re in a tough situation. That’s why the Solvency Shark and the entire Debtors Unite team are here to help you. MY ADVICE: don’t let your past actions determine your future ones. You now have the knowledge to affect 65% of your credit score in a positive way – I suggest you do so.
Sit down next to a flat surface with pen, paper, all your bills and your brain. Build a basic budget. Make sure it has you breaking even each month. If you can finagle a surplus, all the more power to you. Use that surplus (or the money you’ve set aside in your break-even budget for this purpose) to pay your creditors. Pay them more than the minimum amount – it’s the only way to defeat the slow growth of interest. And pay them on time. Each month. Forever.
This way, you’ll be killing two birds with one stone. By paying on time, you are improving your payment history. By paying more than the minimum amount, you are reducing the amount of debt you carry. This, in turn, is improving your debt ratio. It’s an elegant solution to the problem of a poor credit score!
Live well, live well within your means, and remember – that’s how the Solvency Shark smells it.
P.S. For further help, surf on over to David Pilley’s take on improving your credit score. Just remember – the Solvency Shark is lurking underwater, and he thinks your surfboard is actually a tasty seal.
He served as a Senator for the Graduate and Professional Student Federation, fighting to keep tuition costs down for graduate students struggling with their finances and student loans. He also developed his budgeting skills during his time as a Treasurer for the Graduate Romance Association. He enjoyed becoming more active in his local community and working to make a positive effect on his surroundings.
While an undergraduate himself, he spent a year abroad in Europe earning his degree in Spanish and French. While studying in both Sevilla, Spain, and Montpellier, France, he was exposed to the everyday reality of living under different economic and financial systems. Among other interesting travels he has made is a financial pilgrimage to the Spanish stock market in Madrid.
Stewart Pelto brings his rigorous academic education and his international experience to the problem of raising credit awareness and promoting financial responsibility. He hopes that his articles will teach his readers about debt and credit in an easily accessible and readily understandable way.
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