Your credit score says a lot about you. If you need credit to apply for a home, apartments, or even buy a car, lenders are going to look into your history. Having a low FICO score only can hurt you. Everyone needs to borrow money at one time or another.
There are benefits of having a great score like being able to borrow money at low-interest rates, and qualifying for a credit card that offers great incentives. There are many dynamics to a strong FICO score. If you want to increase yours, then read on to understand how your score is determined, and what you can do to increase it as fast as possible.
What is a Credit Score
A credit score is a 3 digit number that you are assigned from one of the 3 major credit bureaus. You probably are aware of one of them. They include Equifax, TransUnion, and Experian. They all have the proprietary model that they use to derive your score.
The max score you can attain is 850. Although you will only need a good score to qualify for a low-interest rate. So don’t worry so much about getting the 850. You don’t get anything extra once you already have that good score.
A FICO score shouldn’t be confused with a credit score. This 3 digit number is provided by the Fair Isaac Company. They are a publicly-traded company on the NYSE.
- Remember the higher the score the better.
- You don’t need an 850 to have good credit. You just need a score that’s good enough.
What are the Most Important Components Used in Calculating My Score
If we knew how our scores were calculated, we could focus on those parts first. But all of the credit companies use a proprietary model. Luckily, because of various sources, we know some of the biggest components used to determine a credit score.
While these aren’t overnight quick fixes. You can get started today and improve your score significantly.
What Do You Owe
One of the biggest factors will be the amount of money you owe, compared to the total credit limit you have. This will have big implications This accounts for 30% of your total score, so pay attention.
For example, do you max out your credit cards? If you do this, it can significantly hurt your score. Credit companies can see how much available credit you have compared to how high your balance currently is.
If you have a balance of $2800 on a credit card with a maximum limit of $3000 then you have some work cut out for you. Start by making larger payments to bring your balance down.
- We can calculate your total utilization capacity using the above example.
- 2800/3000 = .93333
- You are using 93% of your total credit capacity.
You are going to have to bring down that number. There are a couple of ways to do this.
- Pay off a large portion of your balance
- Open up a new credit card account.
Pretend that you open up another credit card account with a limit of 3k and you have a balance on that card of $500.
We can then combine the credit cards and arrive at a new figure.
- $2800 + $500 = $3300 (credit card balance among 2 cards)
- $3300/$6000 (maximum balance available) = 55% total credit capacity.
Using this technique, you did your credit score a huge favor.
Pro Tip: Don’t close out credit card accounts if you don’t carry a balance on them. This accomplishes the opposite and might hurt your credit score. You just decreased your total utilization capacity.
Put it in a drawer and forget about it. The only reason you want to close the account is if there is an annual fee attached to the card.
There probably is a magic number of credit cards that you can carry that will optimize your credit score to the highest possible limit. There is a rumor there is a person who has about 20 credit cards, and has a score in the 700’s.
The other elephant in the room will be your credit history. If you don’t make on time payments, don’t pay, or let items fall into collections, then you are asking for it.
Your payment history will account for 35% of your total score.
- Start paying your bills on time. This will go a long way bringing up your score.
- This makes sense because lenders and creditors will want to loan money to individuals who pay them back on time. Thus strong scores are indicative of people who do just that.
So you have several derogatory items on your credit report. Did you know that eventually, all items on your report will disappear. It might take 7-10 years, but if you have some items that are nearing that time frame, you won’t want to take any action on those accounts.
- Just because the items fall off your report doesn’t mean that you don’t owe that money to that vendor any longer.
- Also as negative marks on the credit report start to age, they won’t impact your score as greatly.
So What is a Good Score
Since the majority of us won’t see a perfect 850 score or anything near it, what is a good score that will allow us to qualify for great interest rates and other perks? According to Equifax, here is their definition of credit
- 670-739 = Good
- 740-799 = Very Good
A vast majority of lenders want you to be in the good range to qualify as low-risk borrowers.
- Since 65% of your score is calculated by making on-time payments and your total credit utilization, target these 2 metrics first.
- Don’t cancel credit cards with zero dollar balances. You might want to think about applying for another credit card to increase your total available credit.
- Start making your payments on-time.
- Don’t worry so much about derogatory credit marks, as they will lessen over-time. And given enough time, they will fall off your credit report.