• Harry N. Stout

Are You Scoring Enough? Part 3


Are you scoring enough? I am not talking about sports, video games, or other activities. I am talking about your personal credit score. As we discuss in the FinancialVerse, your credit score is extremely important and a low score could restrict your ability to get credit when you need it most. In this post, we will discuss what you can do to improve your score.


The Good News: You Can Improve Your Score

There's lots you can do to make sure you have a good credit score. Most importantly, make your credit card and loan payments on time so that the credit bureaus are recording your track record of consistent timely repayments. As we discussed in our prior post, 35% of the FICO score is based on your payment history.


An article by Tobie Stanger of Consumer Reports suggested the following actions to take to effectively improve your score:

  • Pay your credit card and other bills on time. As disclosed on the FICO website, 35% of the FICO score is determined by your payment history—that is, how often you pay on time. It's better to pay the minimum each month than fall behind.

  • Check your credit reports. You can request one free credit report from a different reporting agency every four months through AnnualCreditReport.com There’s no scoring penalty for requesting these reports and checking the score yourself.

  • Don’t apply for multiple credit cards at once. Unlike applying for a mortgage, auto loan, or student loan, applying for several credit cards generates multiple "hard pulls" about your credit history and can hurt your score.

  • Don’t open too many new credit accounts at once. By doing so, you reduce the average “age” of your accounts, which can lower your credit score.

  • Don’t cancel unused cards (unless they carry an annual fee). Part of your score depends on the ratio of credit used to total available credit. Eliminating a card reduces your credit line and can raise the ratio, which works against you.

  • Keep credit balances low. Maintaining a revolving credit balance under 10 percent of your total available credit is wise. A higher ratio indicates an elevated credit risk.

  • Maintain a variety of credit types. Successfully paying, , an auto loan, a student loan, and credit card bills over the same period shows that you’re able to juggle different types of credit. That accounts for 10% of your score.

  • Pay off debt in collections. The most current versions of the FICO score ignore collections with a zero balance.

  • Beware of keeping high balances. If you charge everything on your rewards card for the points, for instance, switch to cash or a debit card for a couple of months before applying for new credit. Lenders can’t tell from your score whether you pay your balances in full every month. But they’ll see from your credit score, a snapshot in time, that you’re charging a lot relative to your credit limit. That can be viewed negatively.

  • Get a personal loan to pay off credit card debt. You can improve your credit score by paying off your credit card debt by taking out a personal loan. The interest rate on the loan will also likely to be lower than credit card interest rates.

  • Get a secured credit card after bankruptcy. If you’ve been through bankruptcy, start populating your credit report with good credit. Using a secured credit card (that's linked to a bank savings account) may be an effective way to rebuild your credit. A bankruptcy will have less impact on your score over time as long as you aren’t defaulting on new loans. Keep in mind, though, that Chapter 7 and 13 bankruptcies stay on your credit report for 10 years.

Programs for People with Low Scores/Credit Histories

People with thin or subprime credit histories might consider signing up for one or both of the new credit improvement programs, Experian Boost and the Fair Isaac Corporation's UltraFICO. Boost, which launched in March 2019, includes utility payments in the score calculation, and UltraFICO, expected to roll out nationally later this year, reviews banking history. For more information, check the websites of Experian and FICO.


Summary

Your credit score is one of the most important measures of your financial credibility. Once you know your score, make plans to raise it if you need to.

  • Pay your bills on time.

  • Pay down debt.

  • Don't close any credit cards (because your length of time matters).

  • Have a good mix of credit.

The more you can improve your score, the more you can strategically handle debt throughout your life.


For the most current information about credit scores and credit reporting go to the websites of Fair Isaac Corporation and the three credit bureaus at:

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