Most people know that they have a credit score, but in the press of daily living, learning how a credit score is calculated, and what you can do to improve your credit score, are among the many things that can be put off until next week…and usually are. Considering the impact that your credit score can have on your daily cost of living, that is more than just a little short sighted.
How Does My FICO Credit Score Make A Difference In My Day To Day Financial Life?
In the US there are three major credit rating agencies, of which FICO is the largest. FICO and the other two major US credit rating agencies can best be described as for-profit enterprises that collect information about your money management history that is of potential value to lending institutions. They consolidate that information into a credit report, which becomes the basis for your credit score. When you apply for any kind of credit, lenders routinely purchase that collected information as a measure of your credit worthiness. Does it pay to try to improve your credit score? Here are a few of the important things your credit score determines:
- The interest rate you are offered for home a mortgage or a home equity line of credit;
- The credit card interest rates you qualify for;
- The credit limit card issuers make available to you;
- The upfront cash required in order to initiate a car lease agreement;
- The interest rate and terms available to you for auto loans, debt consolidation loans, and other installment loans.
What Is In Your Credit Report?
In terms of their relative importance to your effort to improve your credit score, the information that makes up your credit report includes:
- Your history of making monthly loan payments in full and on time;
- The total amount you owe, especially as a percentage of the credit that is available to you;
- The types of loans that you have qualified for in the past, and your success in repaying those loans. Types of loans considered include home mortgages, installment loans for automobiles or appliances, credit cards, debt consolidation loans, and others.
- Your recent history of credit applications.
How Can You Improve Your Credit Score?
If your credit report contains many negative entries, it may take months or years to improve your credit score. The good news is that “recent credit report inputs” are weighted higher than “old credit report inputs”, so it does pay to get started. Here are nine basic steps you can take to improve your credit score:
- Get a free copy of your FICO credit report. You are entitled to one free copy of your credit report per year from FICO and each of the other major credit reporting companies. Take the time to carefully check the report for errors. Errors that negatively affect your credit score do occur, and it is your responsibility to find them and report them to the credit rating agency. Finding and correcting erroneous negative credit report inputs is the fastest way to improve your credit score.
- Get help from an experienced debt counselor to establish a monthly household budget that includes a regular allocation for debt repayment that exceeds minimum payment requirements.
- Build up a “rainy day” savings account to help you through tight budget months and/or to handle unexpected emergencies without missing a “due date” on your existing debt.
- Do everything you can to avoid accidental late payments. Setting up automatic direct payments from your checking account for loans that have the same payment every month is a good first step. Some people find it helpful to make all other debt payments on the same date or dates each month.
- Establish a “hit list” to focus debt repayment funds on the debts that are most injurious to your credit score.
- If recommended by an experienced debt counselor, consider applying for an installment debt consolidation loan to reduce the number of payments you have to make per month, and possibly lower the total repayment amount per month. Be aware, however, that debt consolidation loans often increase the total amount of interest you will pay by the time the loan is paid in full.
- Keep a couple of credit card accounts open even if you could afford to close them entirely. Use those card sparingly, and the entire balance in full every month.
- Take out one or two small consumer installment loans that you are sure you can pay off easily. MAKE EACH PAYMENT IN FULL AND ON TIME!
- Be cautious in authorizing lenders to request credit reports. Bring your own copy of a current credit report to the lender to assure that you will be approved pending his or her verification of the credit information you presented. Avoid applying for credit and being denied.