Although there are a number of credit scoring systems in existence, the most well-known (and used) system is the FICO score developed by Fair Isaacs and Company. The FICO score ranges from 300 to 850. The higher the score, the better the score. A general guideline places the median FICO score at approximately 725. (The median score is defined as half of consumers score above and half score below.) In our current economy, borrowers typically need a FICO score above 760 to qualify for the best loan rates. It doesn’t mean that you wouldn’t be considered for a loan if you have a credit score below 760, it just means that you would most probably be offered a loan with a higher interest rate and less favorable terms.
Before you can improve your credit score, you have to know what it is. You can obtain your credit score by going to www.myfico.com.
Here are some steps to improve your credit score:
- Reduce your credit card debt. It is best to keep your outstanding balance-to total available credit, as low as possible. This refers to your debt-to-credit-limit ratio. Lenders prefer to see that you have not used a good portion of the credit that is available to you. Getting your balances below 30% of the credit limit on each card can be very helpful. Paying down your credit card debt is more beneficial than paying off installment loans such as a student loan or a car loan. Although it is recommended to first pay off your credit cards with the highest APR when trying to reduce the overall amount of your debt, experts recommend that when you’re trying to improve your credit score, it’s best to first pay down cards on which you’re closest to your credit limit.
- Pay your bills on time.
- Pay your delinquent bills. While paying off delinquent bills will help improve your credit score, remember this information will remain on your credit report for seven years.
- Use your credit cards sparingly. Piling up large credit card balances can hurt your score even if you pay your bills in full each month. The balance reported on your last statements is the information given to the credit reporting agencies. Even if you later pay these balances in full, the agency isn’t showing this information at the time. It’s simply showing that your balance was a certain amount. To be safe, limit your charges to 30% (or less) of that card’s credit limit. By the way, paying off your balances in full each month is financially smart.
- Don’t close unused credit card accounts. By closing accounts, you’re altering your debt-to-credit-limit ratio. That is, you’re reducing the amount of credit available to you. Let’s say you owe $1,000 on several accounts and have $3,000 available to you in credit. By closing one account, you’re increasing your debt-to-credit-limit ratio, putting it into an undesirable, higher range.
- Don’t open a number of new credit cards. You may think that you’re increasing your available credit, but this could actually lower your score. Every time you apply for new credit an inquiry is placed on your report. This can be a signal to credit reporting agencies that you’re desperate for money and consequently will have the opposite effect than you desired.
- Let your accounts age. Fifteen percent of our credit scores are obtained from the length of our credit history. Therefore, the older your credit history, the better. Therefore, don’t stop using your oldest cards. If you do, your credit card issuer may stop sending information on these cards to the credit reporting agencies. Although the account may still appear, they won’t be weighted as heavily. It’s best to use your oldest cards every few months by charging a small amount and paying it off in full by the due date.