Published By Janet Gershen-Siegel at September 8, 2017
Your FICO consumer credit score is one of the most important pieces of information about you, as 9/10 of all top lenders use it to determine if you can pay off a loan. It can mean the difference between getting a mortgage or other loan or not, or even whether you get a job. In addition, if you have a small business or a startup (or your business can be both), then your ability to get a personal loan can directly impact whether you can get a business loan. And if you get a loan, it can affect how much an institution will lend you, along with the interest rate. So you want your FICO score to be as high as possible.
In order to push that number higher, you need to know exactly what goes into a FICO consumer credit score. MyFICO, the consumer arm of FICO, explains it as follows.
Your FICO score comes from a combination of five factors:
Therefore, if you have a history of paying your credit cards and debts (such as your mortgage) on time and not carrying a balance from month to month, you will have good numbers for the first two factors, which make up nearly 2/3 of your score.
Also, a person new to credit (for example, a recent college graduate) will have not so good numbers for the third and fourth factors, but those only account for ¼ of the overall score. Once they establish more of a credit history, that person will do better on the third and fourth factors. Those will have less of an impact than paying off their balances on time, but they’re much better than nothing.
As for the final factor, a credit mix just refers to the kinds of debt you are carrying, such as student loans, credit cards, a mortgage, etc. But don’t run out and sign up for more credit cards just to improve your credit mix! Because this is a less important factor, you will do better to carry fewer cards and pay them off on time, rather than open another charge account and have the potential to be late paying its balance.
Before doing anything else, get your credit report from Equifax, Transunion, and Experian (you can use AnnualCreditReport.com to get all three), and look it over. Check for suspicious charges, or for closed credit card accounts or paid-off loans. Make sure the report is err0r-free, and take it up with the applicable credit bureau if it isn’t.
Never be late again by adding a calendar reminder to your computer or phone. Establishing a habit of paying your loans and cards on time will go a long way to improving your score.
Look at your expenses and budget where you can. Stop using some of your cards to give yourself a fighting chance of getting your balance down to zero. And always pay more than the minimum, so you aren’t paying a hefty amount of interest over and above your balance. Keeping your balances low will make it easier to pay your bills on time. Furthermore, don’t pay one credit card with another – pay down your debt, rather than simply moving it around.
Instead, it will stay on your report for a good seven years. Therefore, try not to let your debts accumulate to the point that they go to a collection agency.
Working with a credit counseling service won’t hurt your FICO score, and working with your creditors will mean your account will be less likely to go to a collection agency.
If you’re new to credit, adding a bunch of credit cards won’t increase your score. And if you have unused cards, closing a lot of them at once can hurt your score as well.
While it makes sense to shop around for the best rate for a large expense such as a mortgage or a car loan, you don’t want to be doing this all the time. FICO will distinguish between a few quick inquiries versus continual rate shopping, and the latter can lower your score.
Finally, raising your FICO score is a good goal to have, but it’s not an end goal unto itself. A better goal, and a more sustainable and helpful one in the long run, is to manage your credit responsibly.