If you have ever heard someone refer to your “score” or your “credit score” they are probably referring to your “FICO Score.” It is called a FICO Score as the way the number is calculated is based on software developed by a company called Fair Issac and Company. Once you have requested a loan, a lender may ask one of many credit bureaus for your FICO Score to determine the risk associated with lending you money. Lenders are interested in trying to determine your ability and likelihood of repaying the money they have lent to you.
Since a lender is trying to make a determination of whether in the future you will have the ability and the willingness to pay them back, much of the decision on whether to lend you money is based how you have behaved financially in the past. It is best to have a high FICO Score as that indicates a low risk. Alternatively, a low score indicates a high risk. A high score (or low risk) may help you attain lower interest rates on a home loan, a car loan or even on a credit card. Over the years, a favorable score can save thousands of dollars in interest.
There are many ways to improve your FICO Score. Since information is on your credit score can be on there for seven years, there is no “easy way out” or “quick fix.” The best way to improve your credit score is to understand ways to use credit responsibly and be consistent over time.
First, if you are not doing so, pay your bills on time are by the due date. Paying on time shows you are behaving financially responsible and that have the willingness to payback without excuses and that the lender can count on you to make the needed payment.
Second, keep current on your credit. If you have fallen behind catch up and stay current. You will also want to keep your credit card balances low, not only will this improve your score but it will save you money in interest.
Third, keep your accounts from going to collections. If you are having trouble paying immediately contact your creditors and work with them for a solution. Many lenders are interested in helping an individual make good on repaying debt.
Fourth, pay attention to your credit cards. If you are looking to shut down a credit card shut down a newer card as opposed to an older card. The older card is important as it shows a long, hopefully positive, relationship with the lender. If you need more credit don’t open a new card. Work with a current credit card on increasing your available credit.
Lastly, don’t move credit around by moving it from one lender to another. Get credit and pay it off. Then get new credit and pay it off. This strategy is only a short-term fix and avoids the inevitable repayment of the debt.
There are a few things you can do now.
First, check your credit report. The reason for this is to understand what is being reported about you. Additionally, you can check for errors. If something is reported incorrectly it should be disputed immediately. Here is where you can get your credit reports:
- Experian: www.experian.com
- Equifax: www.equifax.com
- TransUnion: www.transunion.com/
Second, set up payment reminders or pay bills immediately after you have received them. This can be done by making reminders, marking on a calendar due dates or utilizing folders numbered 1 to 31 for the days of the month. Automatic payments through your bank can be another way to ensure payment as amounts are automatically taken from your account.
Third, attempt to reduce your outstanding debt. One way is to stop incurring new debt. Another way is to create a list of all your debts and target one or two to pay off first using the highest interest rate as a determining factor. Another way is to use “free money” such as bonuses, rebate checks or a tax refund and apply that money to debt owed.
As the lender is trying to make determinations about you, you have the knowledge to control the information about you. By understanding the FICO Score, what is it used for, and how to manage it you can save yourself thousands of dollars over your lifetime.