Most consumers think that only lenders will check on their credit for the purpose of extending credit. That is not true. Along with lenders and landlords, home and automobile insurance companies also routinely do so, as well as certain employers and government agencies. If you are aware of any potential blemish on your credit history and in the market for any type loan, it is wise to check your credit score beforehand, so as not be denied credit and further blemish your credit history. If your score is low, it is highly recommended to improve it before applying for credit, as this will most likely save you a substantial sum of money in the long run through a lower interest rate.
Your credit score is expressed as a FICO score, with FICO standing the Fair Isaac Corporation, the company that collects and evaluates credit data, then the score is reported by three credit agencies, Transunion, Equifax and Experian.
Different factors affect FICO scores and consist of the following:
- The payment history affects 35% of the score
- Balances on open accounts constitute 30%
- The duration of the credit history is 15%
- New credit affects 10%
- The final 10% is derived from the mix of credit types
How To Improve Your Credit Score
- Paying on time: As this accounts for the largest percentage, it is crucial to pay all bills in a timely manner.
- Balances: High balances are definitely not recommended. It is more appropriate to spread charges across different cards in order to maintain low balances, than to concentrate charges on a single card, no matter how beneficial that card may be. This is also where an interesting situation may arise. Numerous consumers complain about how low their FICO scores are even as they pay off all of their balances every month. This is due to the difference between the due date and the reporting date. Let us consider this scenario: your due date is the 20thand you pay off your balance on the 15th. However, unknown to you, your creditors report your credit activities to the three credit agencies on the 10th. At the time of reporting, you do not have a $0 balance, thereby reducing your FICO score, and this cycle may repeat itself indefinitely. In all likelihood, you will not be able to ascertain the reporting date from the support staff of your creditors, thereby the only way to rectify this situation is to do it yourself. Check your credit report regularly. After your payment has been posted, and if your FICO still has not changed, you will know that you have missed the reporting date. Then make your payment earlier the following month, then check your FICO core again. Repeat the process with all of your creditors and eventually you will see your FICO score improve by several hundred points. Take advantage of free trial periods from services selling FICO scores, and even if you have to pay for a few extra months, this will be money more than well spent. Only balances in the 10%-15% range will not affect your FICO scores.
- History length: Do not close older accounts, even if they carry a $0 balance and you no longer have any use for the card. The longer the history, the better, with 30 years being the optimum.
- Inquiries: New credit means new inquiry, and the more inquiries there are, the lower the score, especially if no matching credit has been granted, implying rejection by a creditor.
- Credit mix: It is best to have an installment loan to go along with revolving loans, and mortgages will also help if possible.
These steps should be adhered to on a consistent basis whenever possible. Once your FICO scores reach 720, you will have achieved your goal, so try your best to maintain this level.