Strategies to improve your FICO Score

Strategies to improve your FICO Score

Five FICO Score Factors You Need to Know

Many people lack knowledge about their credit scores, arguably the single most influential number in their lives. In fact, forty-nine percent of 1,013 consumers polled do not understand that credit scores measure credit risk, according to a 2005 survey by the Consumer Federation of America and Fair Isaac Corp., the company that created the most widely used credit score formula called FICO.

The five categories that make up a FICO credit score are:

Payment History – 35%
Capacity (Amount You Owe) – 30%
Length of Credit History – 15%
Types of Credit – 10%
New Credit – 10%

Payment History – 35%

This category includes payment history information about several different types of accounts such as credit cards, retail accounts and installment loans. Many factors are considered including number of past due items on file, amount past due on delinquent accounts or collection items and severity of delinquency (how long past due). Below is a chart depicting the weight assigned to each year of an individual’s payment history:

Timeframe Approximate Weight Assigned to Year
Most recent 12 months 40%
Prior 12 to 24 months 30%
Prior 24 to 36 months 20%
Prior 36 to 48 months 10%
Older than 4 years 0%
Capacity (Amount You Owe) 30%

The FICO scoring model weighs capacity heavily because it knows that the majority of Americans who go bankrupt charge up their cards to the limits before they file. The FICO model considers three separate components of an individual’s credit when assigning capacity points:

Installment balances compared to the original loan amounts.

Revolving account balance compared to an individual’s revolving credit limit on an account-by-account basis, and,

Total revolving account balances compared to an individual’s total revolving limits.

It is in your best interests to keep balances low on all revolving credit and pay off debt within open accounts instead of closing accounts and consolidating it into one or two accounts with higher balances.

Length of Credit History – 15%

Even if you no longer want an older account, you should think twice about closing it. Lenders are looking for borrowers with long credit histories. Also, if you have new credit you should be cautious about opening many accounts. Rapid account buildup may look risky because of uncertainty in handling the credit. Hard inquiries, or requests from creditors for a copy of a report, are tracked on the credit report for 24 months. But the inquiries from the most recent 12 months are included in the FICO score calculation. If you would like to opt out of pre-approved credit offers, you may do so at:

http://www.creditunions.com/advertising/rd06/redirect_outprescreen.html

Types of Credit – 10%

This category looks at the overall mix of credit such as credit cards, mortgages or consumer finance accounts. You should try to balance the mix but are advised not to open new credit accounts for balancing purposes unless necessary. It is unlikely that adding accounts will improve your credit score.

New Credit – 10%

Approximately 10% of your credit score is based on how many recent new accounts you have established. This factor reviews:

Number of accounts
Length of accounts
Recent requests for credit report
Length of time since credit report inquiries were made by potential lenders

You should do all of your rate shopping in a two-week period since you can inquire an unlimited amount of times and it will only count once in that time frame. Also note that if you check your credit scores by going directly to the credit reporting agency, it will not affect your credit. Article composed by Mary Royston, Marketing & Communications Manager, Callahan and Associates, Inc. Sources: Liz Pulliam Weston, Prentice Hall Publishing.

Top 10 Strategies that Will Improve A FICO Score

Ensure credit bureau data is accurate and dispute legitimate errors.

Focus on bringing currently delinquent loan accounts current. Do not allow current trade lines to go further delinquent while using cash flow to pay on old collection accounts.

Comparison shop for mortgage and auto loans within a 14-day period of time to minimize the impact of hard inquiries.

Pay off and close second-tier finance company trade lines.

Pay down the credit cards first that are near their limits (assuming interest rates are close to the same).

Pay down total revolving balances, but do not close these accounts. (i.e. keep balances low and limits high).

Move revolving balances to installment debt; but again, do not close the revolving accounts.

Minimize new accounts.

If you are transferring balances, a better strategy than getting a new credit card is to ask your current credit card lenders if they have any existing offers. Always ask for as much limit as you qualify for.

If you have closed some revolving accounts recently, a better strategy than opening up new accounts would be to call the lenders where he or she closed the account and see if they can re-open the same accounts and are able to keep the original open date.

National Distribution of Credit Scores
FICO scores range from 300 to 850. The purpose of the scores is to predict the likelihood of 90+ day delinquency over the next 24 months. The national distribution of credit scores is as follows:

800 & Above

13%
750 – 799 27%
700 – 749 18%
650 – 699 15%
600 – 649 12%
550 – 599 8%
500 – 549 5%
Up to 499 2%
Reprinted from 1st Quarter Data 2007 – CUSP