You may not like this, but the truth can hurt sometimes. Your FICO score says a lot about you. Maybe it doesn’t take into consideration your charitable giving, your charm or a host of other aspects that make you who you are. But your FICO scores speaks volumes to a Lender interested in extending credit to you about your past history and commitment to repay. A low credit score can damage your financial position for years and even decades if not handled properly.
Here is some information on how your credit score is calculated and some basic tips on improving your score. I have had the privilege to work with numerous clients and help them improve their FICO’s since 2001 and these are some of the strategies I have used that have worked the best.
How a FICO Score breaks down
These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different. (from myfico.com)
What should be obvious from this pie chart is that payment history is your most important factor in rating your score. Paying your bills on time, paying more than min payments all will help your score in the long run. But what people don’t realize is that your score is also determined by how much debt you have. So if we back up a little and explain what debt is, I think it will help. Debt is not considered accounts that have zero balances but an open credit card. The Credit score agencies actually will reward you for having revolving debt(credit cards) with no balances. So do not take your old credit cards and close them out if you have a zero balance, no service fees and perfect credit history. Those actually help you.
Tip #1 What we need to focus on is paying down your credit card balances below 50% of the balance vs the high limit. If you have multiple accounts with high balances even if you are paying them on time your FICO score will suffer. If you can keep your credit card debt below 50% or even better yet below 35% the credit agencies (experian, transunion, equifax) will reward your FICO with a higher score.
Tip #2 Collections: These can be so frustrating for a number of reasons. A collection will drop your score significantly and if you are a person with limited credit history it can be a burden for years. But just paying them off isn’t always the answer. The reason why is when you pay them off they refresh the most active date on the credit and then they look like a more recent collection to the credit bureaus. For my clients we advise negotiating with the collection agency the removal of the collection upon payment. Some will not do this but other agencies will agree. Work hard to negotiate and don’t take no for the final answer.
Tip #3 Become an authorized user: This tip is harder to do these days and its debatable how much this helps you. But from what I have seen it can and has helped my clients tremendously. This means convincing a relative or friend to be added to his or her existing credit card account. Keep in mind don’t add on to short term credit cards with high balances, you want an account that is long term with a very a low balance or zero. This will give you some added depth with the credit scoring agencies. Remember to use the card wisely and pay off your balance early.
Tip #4 Dispute errors: You can dispute errors online through Equifax, Experian and TransUnion. By going online and disputing accts that are erroneous the creditor has to verify the validity of the acct or it will be deleted. We have seen numerous accts get deleted this way and its free!!!
“Procrastination is like a credit card: it’s a lot of fun until you get the bill.” Christopher Parker
If you need any help feel free to email me at Dale.entrekin@spm1.com or 619-379-7101
Dale Entrekin
Home Lending San Diego 