Credit scores are often a mystery to borrowers, and many have never heard of credit scores. Credit scoring has become the primary factor for lenders making a favorable credit decision for a borrower.
It’s important to get your credit score as high as possible if you want to qualify for the best loans and credit. Most lenders don’t even look at your credit report; they stop at your credit score. FICO credit scores range between 350 and 850, with 850 being the very best score possible. If you have below a 680 score, there is room for improvement and if your score is lower than that, you might be feeling left out. It is possible to raise your score to a much higher level, and here’s some ways to do it.
What makes up your credit score?
My FICO.com, the original developer of the commercial credit scoring model, has published basic guidelines of what goes into your score:
- 35% – Payment history
- 30% – utilization or how much available credit you use.
- 15% – length of time using credit
- 10 %– types of new credit received
- 10% – types of credit used
Things you should know about credit: (reprinted )
1. Great credit can save you money.
When you have a great credit score, which starts at around 750, you might be offered better interest rates for mortgage loans, car loans and credit cards. Lenders also use the scores to disqualify consumers for the best, most competitive terms and rates.
2. FICO is the most commonly used score.
The FICO Score, created by the Fair Isaac Corporation, is the most-often used credit score by lenders to determine whether to lend you money. You have a slightly different FICO score for each of the three credit bureaus based on information in each credit report.
3. “FAKO” scores are just non-FICO credit scores.
A “FAKO” score is a term used to describe other reputable, non-FICO credit scores such as the VantageScore, which was developed by the three credit bureaus. Experian also offers the Experian National Risk Model, and TransUnion offers the TransUnion New Account Score.
4. Credit scores vary and can change.
Different types of scores might vary from one another, and scores can increase or decrease over time based on information in your credit reports.
5. You can get your credit scores for free.
There are now many ways to get access to both FICO and non-FICO scores. Some are for a fee and some are for free.
6. You might not know which score lenders use.
When you apply for credit, you might never know which credit score or version any specific lender will use to check your credit score.
7. You have the right to know why you were denied credit.
According to the Fair Credit Reporting Act (FCRA), you have to right to know if information in your credit report was used against you and you were denied credit, employment or insurance.
8. Negative items stay on credit reports for a long time.
Most negative items, including any late payments, collections, foreclosures, charged-off accounts, repossessions and tax liens, can remain on your credit report up to seven years from the time of the late payment or default. A Chapter 13 bankruptcy remains on your credit history for seven years, and a Chapter 7 remains for 10 years. Unpaid tax liens can stay on your credit report indefinitely.
9. Negative items can be removed (sometimes).
According to the FCRA, when you challenge a collection account and the item cannot be verified with the reporting source, then it must be removed from your credit report. Outdated (past seven to 10 years, depending on the negative item) and incorrect collections accounts must be removed.
10. Tax liens can be withdrawn from credit reports.
The IRS allows you to have a tax lien withdrawn if you enter into a repayment agreement or pay it in full. The credit bureaus can then withdraw the tax lien from your credit report.
11. Paying bills on time can boost your score.
The number one, quickest way to improve your credit score is to consistently pay all of your bills on time. Your payment history alone accounts for 35 percent of your total FICO score. And, on-time payments are updated every 30 days with the credit bureaus.
12. Technology can help you pay your bills on time.
A budget and a calendar, as well as text or smartphone alerts, can help you pay bills on time and avoid unnecessary late fees and bank fees.
13. Credit card utilization can repair your score.
The second best way to boost your credit score is to pay off debt and reduce the amounts owed to below 10 percent of your credit limits. This will improve your credit usage relative to your credit limit (called credit card utilization), which accounts for 30 percent of your FICO score.
14. Charging cards with balances doesn’t help.
Stop charging on cards that carry an existing balances if you want to boost your credit score.
15. Paying off balances early results in a good payment history.
If you don’t carry balances, using your credit cards periodically for purchases you can afford to pay off before the payment is due can help establish a good payment history without accruing any interest charges.
16. Emergency funds can prevent credit card usage.
An emergency fund in a separate bank account, even just $1,000, can prevent you from resorting to using your credit cards when an emergency strikes.
18. Naming your teen as an authorized user can help build their score.
Teens can get a FICO score if they have any credit account open for at least six months. Making a teen an authorized user on a parent account that you can control is a good way to help them build a positive credit history.
19. Student loan debt can hurt credit scores.
To help teens and young adults boost their future credit scores, talk to them about how to reduce their reliance on student loans for college, whether it is attending a less expensive state school or community college, working at a job before college, applying for scholarships or maintaining a high GPA to qualify for state and institution-based grants.
20. Co-signing loans can hurt your credit.
You should think twice, maybe three times, before co-signing loans of any kind, including student loans, car loans or credit cards, for your kids or grandchildren. It is not a good way to boost your credit score, because the debt will be yours should they default.
21. Identity theft might negatively affect your score.
Identity fraud and theft can wreck your credit score quickly. Signs of identity fraud include accounts you didn’t open, purchases you didn’t make and services you didn’t order, which might appear on your credit report and affect your scores negatively. Tracking your credit score often for unaccounted decreases can detect identity fraud. You can also check your credit reports from each of the three bureaus every four months through the federally authorized site, annualcreditreport.com.
22. Keeping unused credit cards can pay off.
Keeping paid off or unused credit cards can help boost your credit score because you are keeping that unused credit (remember “credit card utilization” above?). Closing your unused credit cards to boost your score isn’t a smart strategy.
23. Hard inquiries can impact your score.
Several or frequent “hard inquiries” can decrease your credit score if it looks like your lifestyle is credit-dependent. However, checking your credit scores and credit reports does not result in a hard inquiry.
24. Credit repair companies can do the work for you.
While you can repair your credit and boost your score yourself, a reputable credit repair company has expertise in dealing with the credit bureaus and can more efficiently identify derogatory items on your credit reports that can be changed. They can challenge those derogatory items and confirm they have been removed to boost your credit score faster.
25. Silverado Home Mortgage can help with credit evaluation and planning.
We offer re-scoring for our borrowers who need better credit to obtain the best loan and rates available. Credit repair and Credit rescoring are different, as the rescoring is improvements done in days, and repair is a longer process. Ask us for details.