Having a great FICO score is essential to getting the best rates on mortgages and other loans. Here are 8 ways to improve your credit score so that you can access better deals. Let’s start by defining what the FICO score is.
What is the FICO Score? FICO is the most commonly used credit score today. The term comes from the company’s original name – the Fair Isaac Corporation.
To calculate credits scores, FICO uses information from three major credit reporting agencies – Equifax, Experian, or TransUnion.
A common misconception is that most people confuse FICO as a credit reporting agency. FICO is a predictive analytics company that primarily focuses on credit scoring services, providing a three-digit number that determines a potential borrower’s creditworthiness.
Whenever you apply for a loan, lenders will usually require a version of your FICO score. The numbers will help them determine if you’re eligible for a loan application, and if you get approved, what interest rate they should offer you.
Aside from loans, you might also encounter FICO scores when dealing with your insurance providers, landlords, or cellphone companies.
How Is Your FICO Score Calculated? Your FICO score is generally affected by these five factors on your credit report:
Payment history: It is perhaps the most essential information among all types of scoring model. Payment history accounts for around 35% of your total credit score. Thus, any late payment will have a significant effect on your FICO. Credit utilization: This criterion refers to the balance-to-credit-limit ratio, and accounts for around 30% of your FICO score. To get a higher score, you would not want to use not more than 30% of your available credit on a single card or in total. For instance, if you have credit cards with combined limits of $15,000, you can achieve a higher FICO score if you keep your combined balances not more than $4,500. Length of credit history: The age of your credit accounts for about 15% of your FICO score. It is based on how long an account has been open. A longer credit history means a higher credit score. Recent activity: This factor looks on how much new credit you’ve applied for in the past 3-6 months. If you’ve applied for credit many times in over a couple of months, you’ll be seen as a risk and will reflect a lower FICO score. The number of recent credit applications accounts for 10% of your FICO credit score. Credit Mix: This refers to the different types of accounts you have including auto loans, mortgages, credit cards, student loans, and other installment loans. Having a varied number of credit types can help raise your score slightly. However, be careful in applying for several accounts all at once as they may do more harm than good to you. Credit mix accounts for the remaining 10% of your FICO score. Having a good credit score has several benefits, including getting better rates on your insurance, increasing your chances of a mortgage, credit card or auto loan approval, receiving better interest rates, and having more negotiating power.
Factors Not Included in Your FICO Score While FICO considers a wide range of data to arrive at your credit scores, there is information that is not included on their evaluations. According to FICO, none of the following has an effect on your credit score:
Race, religion, national origin, color, sex, and marital status Age Employment information: Lenders may, however, consider this information. Residential address Participation in credit counseling programs Interest rates on your credit accounts “Soft” inquiries, which refer to requests when you want to check your credit report or scores Information about child/family support obligations Any information not included in your credit report Any information that is not proven to aid in predicting your credit performance in the future
8 Ways to Raise Your FICO Credit Score Improving your credit score doesn’t happen overnight. The best way to restore it is to use your credit responsibly over time.
Here are 8 helpful ways you can take to improve your credit score:
Verify Your Accounts Are Current As mentioned earlier, payment history accounts for the most significant percentage on your FICO score. Therefore, it’s vital that you verify that all your accounts reporting to your credit report are current. If you see any accounts on your credit report that are past due, make sure to catch them as soon as possible and pay at least the minimum required payment within 30 days of the due date. If you manage to pay accounts on time with no late payments within 12-24 months, expect a dramatic increase in your FICO score. Improve Your Debt Utilization Ratio As previously mentioned, credit utilization accounts for about 30% of your FICO credits score. Therefore, focusing on the second most crucial criterion will help improve your FICO score. Generally, debt utilization of 30% or less is considered good. The best way to improve this ratio is to reduce the amount of debt you owe either by paying them on time or taking a break from using your credit cards. You may also increase your credit line to remain under the 30% threshold. Dispute Inaccuracies on Your Credit Report As soon as you spot an error on your credit report, request a correction immediately. This is essential because removing even one late payment from your credit report can greatly raise your FICO score. The law requires credit bureaus to investigate on the matter within 30 days unless your dispute is considered frivolous. To correct the information, you’ll need to submit documents supporting your position. However, if you have a mortgage, you can benefit from a process called “rapid-rescoring” which will help you settle the problem fast. Apply Rapid Re-Scoring With rapid re-scoring, the lender will be the one reaching out to credit bureaus on your behalf and will process the necessary work to show that your credit report should be corrected and updated. Since credit bureaus prioritize this type of request, usually in just 48 hours, rapid rescoring is a method you can do to get a higher credit score fast and also get approved for a home loan. Include Rental Information on Your Credit Files FICO Score 9 now includes rental history on credit scores evaluation (see more below). So if you’re renting your own residence, you may ask to have your rental payment history added on your credit reports. Studies have shown that including this data on your credit files can raise your credits scores by 10-20 points, provided that you’ve been paying your rental fees on time. If you have an excellent rental history, take advantage of this method to get higher credit scores. However, take note that you have to ask your landlord to verify your on-time payments and companies, such as RentTrack.com or Rent.Reporters.com, to supply the information to the credit bureaus. Time Your Payments One effective way to increase your credit score is to pay your balances on time or if possible earlier than the due date. Lenders usually report to credit bureaus once a month. If you fail to pay them at the right time, it will reflect negatively on your credit files and will cause your credit score to go down consistently. Ask for a Little Grace There are times when you ended making a small slip up, and you weren’t able to pay your accounts on time. If you have a good payment history, you can ask a creditor to help you out and give you late-payment “waived.” This works best if you spot the delinquency early and contact them right away. You can try making a phone call and ask for a little grace while explaining your story behind what happened. Creditors are lenient if there’s a legitimate reason and if you can reason out measures you’ve done to avoid a repeated occurrence. Settle Up Collections, Charge-Offs, Judgments, and Liens When reviewing your credit report, check if you got credit card charge-offs, old collection items, and liens. If you’ve got any of those mentioned on your credit report, contact your creditors and collection agencies and settle the items one-at-a-time. In some cases, these matters can be negotiated with your creditors to erase a trade line entirely in exchange for settling an account for its full balance. However, this depends on your creditor and must be resolved in an agreement. The FICO Score 9 Over time, different versions of FICO credit scores were developed. FICO releases updated versions of the algorithm to borrowers every few years. However, it is important to note that lenders are not required to use the latest version. According to FICO, there are around 50 credit FICO scores used in the market today.
As of 2019, FICO 9 is the most recent and most predictive FICO score. It was made open to the public in 2016 with three notable changes compared to the commonly used version, FICO Score 8.
The 3 primary items that are analyzed and calculated differently in FICO 9 are the following:
Medical Collections FICO Score 9 has de-emphasized medical collections. This is based on their research which showed that unpaid medical accounts have a lesser credit risk than due non-medical accounts. Considering the complexity of the medical system in the country, this change on the FICO score is quite sensible. Due to various factors, collections concerning medical bills have become pervasive. According to the Wall Street Journal, there are 64.3 million people who have medical collections on their credit reports. Paid Collections The latest version of FICO has disregarded collection situations that were paid off in full by the consumer. This is good news because not only does previously paid collections will cease to drag on your credit score, but it will also generate an incentive to pay off any that are still open. In other scoring models, paid collections don’t serve as much of a benefit. A person who owes a debt might be motivated to wait for years until a paid or unpaid collection is removed on their credit report. However, with FICO 9, paying off a collection will make it nonexistent as far as your credit score is concerned. Rent Payments A not so good rental history will be reported against you, such as unpaid balances or charges with property damage. But an excellent rental history used to not be reflected on your report even if you’ve been paying rental payments on time for years. With FICO score 9, rental history is now factored into your credit score when a landlord reports payments to one or all of the credit bureaus. This latest score version is especially helpful to those who have good rental histories or to those who have little credit. However, it’s a piece of bad news for those who don’t pay their rental fees on time. How to Check Your Credit Score FICO score is the credit system used in approximately 90% of US lending decisions. Since more people want to know the scores their banks are using, FICO scores are now directly available to consumers. You can find your FICO scores from RCC, Trans Union, and Experian by visiting myFICO.com.
Some banks and credit card issuers and unions will give your FICO score for free on your monthly statement.
What is a Good Credit Score? Generally, FICO scores range from 300-850. The higher the score, the lower the credit risk and the more chances of you getting good rates with lenders. Experian defines the following FICO score ranges:
300-579 Very poor rating: An applicant with this score has a lesser chance to get approval for a credit 580-669 Fair: Applicants with this rating are considered subprime borrowers 670-739 Good: As stated from Experian’s website, only 8% of these applicants are likely to be seriously delinquent in the future 740-799 Very good: Applicants with this rating are more likely to receive better rates from lenders 800-850 Exceptional: An applicant with a score in this range has more chances of getting the best rates from lenders A bit of History
Credit can be traced back to the mid-1800s when it was conducted mostly by people in the commercial industry. Later in the 1900s, credit by consumers began to be evaluated as well.
In 1970, the government passed the Fair Credit Reporting Act (FCRA), which requires credit bureaus, such as the Retail Credit Company (RCC), to make their files public, but with data on sexuality, race, and disability removed. The new act slightly harmed RCC’s reputation which has previously solicited this type of information on millions of American citizens. The company managed to overcome the difficulty and changed its name to Equifax in 1975.
After a few years, TransUnion and Experian were created. These three companies came to be known as the top three giants among credit reporting agencies.
With the immense demand for credit services from these agencies, they also encountered increasing difficulty in comparing and interpreting their reports. In their pursuit to have a standardized industry credit score evaluation, the three companies started working with a well-known tech firm – Fair, Isaac, and Company, which is known today as FICO.
The tech firm was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac. In 1958, they developed their first credit scoring system. The credit scores were then made available for use at RCC, Experian, and TransUnion three years later.
The Federal National Mortgage Association (FNMA), also known as Fannie Mae, and its brother organization Federal Home Loan Mortgage (FHLMC) commonly known as Freddie Mac, recommended the use of the credit scores for mortgage lending in 1995.
In 2009, Fair, Isaac, and Company officially changed its stock symbol and brand name into FICO.
Conclusion Purchasing a home or applying for an auto loan or credit card are just some of the big decisions we make in life. If you take the necessary actions to improve your FICO credit score now, and you will reap the benefits when you need them. Remember that there’s no easy fix for building a good credit – it takes a sensible approach which you should strive to maintain.
Unfortunately, not everyone can get approved for a loan. Creditors look at several things to consider your application, and the first thing they might want to see is your FICO score. Some lenders can be so picky when they find that your FICO score is just average or might even decline your application in an instant if you have a very low rating. Here, at Loansnap, we take a look at your entire financial picture before we make a recommendation on a home loan. You can see how much house you can afford by filling this short 5-min form.