How To Improve Your Credit Score

In order to understand how to improve your credit score, you must first be aware of the different aspects that the FICO score covers and how it can variate. In this article we shall be looking into:

• How the FICO score is calculated
• Differences between FICO and a credit score
• What changes your credit score
• Different types of available credit

FICO and how to improve your credit score

The FICO score is divided into five factors which carry a percentage weight. Looking at each of the five factors you can see how each has an effect on the final score. These are important to understand in order to improve your credit score. These are as follows:

1. Payment History – 35%
2. Credit Use – 30%
3. Length Of Credit History- 15%
4. New Credit – 10%
5. Type of Credit – 10%

The payment history

This factor relates to how you have conducted any credit account. If you have made late payments or missed a payment completely, it can substantially reduce your score. Any potential borrower who has late payments noted on their credit history will alert lenders about unreliability. This could mean an increase in the rate of interest offered for credit or an offer of credit with less rewards.

Credit use

This relates to the amount of credit or debt that you have. Lenders judge that a responsible person will only use around 30% of the credit that they have available. e.g. a credit card with a limit of $5,000 should not have an outstanding balance of more than $1,666.

Anyone with a much higher outstanding balance and who is only paying off the minimum amount requested would be judged to be more of a risk. This kind of behavior flags up concerns because using up to the higher credit limit can signal that you could be using your card to subsidize everyday expenses.

Length of credit history

The credit length is the term of outstanding loans and takes into account the most recent borrowing. If you are new to borrowing your FICO score will be lower than someone who has a long history of repaying loans.

New credit

This part of the score shows any accounts opened in the previous six months. Opening several new accounts in a short space of time will indicate a greater risk and this also applies to those with a short credit history.

Type of credit

The type of credit is not so important to a credit score but it does help lenders to assess whether you have just one kind of loan e.g. credit cards. Or, whether there is a good mix of several types like a mortgage, auto loan or student loan. Unless there is a very short credit history this factor is not so important.

Differences between FICO and a credit score

Each credit agency has a different method of creating credit scores with some putting more weight on certain factors than others. So, a score from Equifax could be different to one calculated by Experian. FICO scores are separate to agency scores.

A FICO score ranges between 300 to 850. 850 is rated excellent and this is the score that will mean you get offered the best interest rates and loan terms. The categories of FICO scores:

1. 800 plus – Excellent
2. 740-799 – Very good
3. 670 – 739 – Good
4. 580-699 – Fair
5. 579 and below – Poor

Someone with a poor FICO score could expect to pay an interest rate five times higher than someone who has an excellent rating. That is, if they were granted a loan. Credit agencies use FICO scores and add in some of the other 100 factors to determine your individual credit score with them.

What types of credit can change a credit score?

The mix of credit that is shown on a credit history will influence a credit score. Having a range of different types of credit is preferable to having only one kind. There are three main kinds of credit. These are installment credit, revolving credit and open ended credit which can all help improve your credit score.

Having access to a range of different types of credit is preferable to having access to only one kind.

Installment credit

Installment credit could be a student loan, home loan, personal loan or an auto loan. This kind of agreement involves paying back the sum borrowed in fixed payments each month. The repayments include the interest charged for borrowing and must be made on time to help improve your credit score.

Revolving credit

Revolving credit is usually on credit card accounts. With this kind of contract you can pay a different sum each month and are required only to make the minimum payment advised on the monthly statement. Additional interest is charged on the balance if you do not pay off the sum in full.

Open ended credit

Open ended credit is the kind that is available on a charge card like American Express or Diner’s Club. In this agreement you must pay off the balance in full each month and no interest is charged.

Charge cards can be used by businesses and you can get this kind of credit for cell phone accounts. Most open ended credit accounts are not shown on credit reports unless there has been a missed payment.

A variety of credit

Most credit agencies agree that a mix of installment credit and revolving credit is the best way to make an improvement on a credit report and credit score. If your report only shows several credit cards, lenders will assume that you might be using these to live day by day. An installment loan and a home loan are the most helpful as they indicate that you have taken on responsibility for a long term commitment.

Even a one year personal loan that has been paid regularly without any missed payments will show a mature attitude to credit. At the end of the day, a balanced credit mix is the best option if you want to make an improvement on your credit score.