The 411 on your FICO Score

Most consumers are well aware of what their credit score means to them: ability to get credit, insurance premiums, access to loans, etc.  Few however are aware of all the many components used these days to assess their credit worthiness.  The process of FICO score assignation is a complex and changing field of finance. 

As credit becomes harder to locate and more difficult to secure, lending institutions are using credit score factoring more than ever to find responsible borrowers.  Find out the 10 major factors that are directly affecting your credit score, and easy suggestions to increase your chances of getting your number up. 

Video: Does Closing a Credit Card Account Affect Your FICO Score?

Write that Check Today 

The most important components of your FICO score, in that they punish you the most if you fail them. Your payment history is composed of three main elements, which affects your credit score:

On-time Payments:  Making your payments on-time may seem obvious.  These days most credit card companies and lenders will assess you a penalty fee, even if you are only one day on your payment due date.  That fee aside, the real damage is what happens to your credit score when your lender reports late payment information to the credit bureaus.  FICO scores take into heavy consideration any late payments when assessing your overall credit risk potential.  A single reported late payment can cut down your number overnight by 50 or more points.  This is because a late payment is determined to be an indicator of a borrower who does not take their debt payments seriously or responsibly.  Avoid this hurdle by making a detailed calendar of your bills and due dates.  Whether paying by mail or online, never wait until just before the due date expires.  Send in payments at least 4 business days in advance as a rule. 

Delinquent Payments/Abandoned Accounts:  Open accounts that you have failed to not make payment on are disastrous for your credit score.  There is probably no single worst mark on your credit report than one of these.  Simple solution, don’t let your accounts go into default.  This may sound easier said than done, but just because you cannot afford to make payment does not mean you have no options.  Contact your creditor and find a solution to close the account either at a settled amount or with lowered payments.  Make every effort to keep them abreast of your financial problems as they relate to the account, and make sure you keep the account open in good standing or closed without default. 

Length of Account:  This may not seem to be a major issue, but it is.  The length of time you have an open account, your history as a customer, speaks volume about your payment history.  More so it gives a detailed overall picture as to how you handle credit given to you over the long term.  To keep your history, never close old accounts, even if you don’t use them actively. 

Have the Correct Information

It is estimated that more than 34% of credit reports contain errors.  That means one out of every three consumers are paying for mistakes either made by the reporting lender, or the credit bureau themselves.  These are 3 common issues that will damage your credit score if you leave them incorrectly attributed to your personal credit report: 

Unknown Accounts:  With so many consumers out there, it can be confusing to the credit reporting industry.  Many Americans share the same name, a similar social security number, or a previous address, with other people.  This leads to inaccurate reporting quite often.  If a bad account is reported on your credit report, you will face a lower credit score through no fault of your own.  The solution:  request your free annual credit report and look it over.  Any unknown accounts should be reported in writing to the 3 major credit reporting bureaus immediately, requesting removal. 

Missing Information:  Your credit report and subsequent score are determined by all elements contained in your report including the information detailing your current employer, contact information, and your home address.  Review your credit report and add this information if it is missing, and correct if it is no longer up-to-date. 

Too Much Can Be a Bad Thing 

There is something on your credit report that is secretly eating away at your credit score potential: excess.  Make sure you keep the following in check: 

Excess Inquiries:  Inquiries are generated anytime a lender, rental agency, or other company asks to review your credit report.  These “peeks” into your credit history send a signal that you may be on a credit “binge” looking for as much available credit as possible.  To avoid this simply apply for things you really are in need of, and not just to see if you will be approved.  Also some companies will let you supply a recently printed copy of your credit report that you yourself requested, negating the need for them to generate an inquiry themselves. 

Overextended:  Your total credit offered to you through various existing lenders you have, in comparison to how much you have used already is considered your debt to credit ratio.  If you are maxed out on several credit sources, your ratio will be high and will lower your FICO score.  Pay down some credit cards if possible, and try and not overextend yourself where possible.  Also use an online debt to credit calculator to see where you stand currently. 

Too Many Cards:  If you open your wallet and there are more than 5 credit cards staring back at you, you have too much credit.  This is not in correlation to your debt to credit ratio, but just a sign you have too much of a need for borrowing money, a credit risk.  Get rid of your cards you do not use, in order of highest interest rate and close the most recently opened ones first. 

The Right Kind of Debt 

Not all debt is created equal.  Your FICO score takes into consideration not just the total amount of credit you have extended but the type of credit used.  Lenders want to see some sustentative loans in addition to revolving credit card lines.  Try and have a stable loan such as a vehicle loan or home mortgage on your credit report.  With interest rates so low, even if you can buy a car for cash, your credit would be better served to take the low interest loan and make payments.  While building a better credit history your money can also be making some for you in the bank, a CD, or other investment. 

Video: How to Improve Your FICO Score

Avoid at All Costs 

Many people when faced with mounting debt look for an end-all solution like bankruptcy filing to start over.  While this may eliminate some immediate problems, a bankruptcy will near fatally damage your credit history and score for a minimum of 10 years.  There is no way to more quickly remove a bankruptcy from your report, so the best advice is to avoid it if possible.  Explore the options of debt consolidation loans, debt management programs, or consult with a personal financial planner before taking the plunge.