With the economy in its recessed, or recovering state, depending on which reports you read, people are more concerned about their finances and in turn credit than in recent years. There are seems to be a lot of mystery behind credit reports and myths people believe about their credit scores that I hear in talking to people about their real estate decisions and loans, so I thought it might be helpful to dispel some of them here. First, your credit score is referred to as your FICO score, what does FICO stand for? FICO is an acronym for Fair Isaac Corporation. The score range is from 300 to 850, and this is not golf, so higher is better. The second question I am asked most often is, “what goes into my score?”
35% of your credit score is based on your payment history
30% of your credit score is based on how much you owe
15% of your credit score is based on how long you have established credit
10% of your credit score is based on whether or not you are currently taking on new credit
10% of your credit score is based on the types of credit account you have (mortgages, installment loans, revolving accounts, etc.)
It is also important to know what does not go into your credit score: race, color, religion, national origin, sex, marital status, age, salary, occupation, title, employer, date of employment, employment history, where you live, current interest rate on a credit card, child or family support obligations, rental agreements, or if you are involved in credit counseling.
But, really, what people want to know most is, “how do I improve my credit score?” There are some simple things you can do to improve your credit score that really do help:
- Pay your bills on time!
- If you have any missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score.
- Be aware that paying off a collections account will not remove it from your credit report.
- If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
- Keep balances low on credit cards and all revolving credit.
- Pay off debt rather than move it around.
- Don’t close unused credit cards as a strategy to raise your score. Responsible credit card use helps your credit score.
- Don’t open a bunch of new credit cards you don’t need just to increase your available credit.
- Don’t open a lot of new accounts rapidly. Manage your accounts well, and add only what you need and can continue to manage well.
Credit Use Tips:
Open credit accounts only as needed.
Have credit cards – but manage them responsibly, which means pay them off every month, on time.
Note that closing an account does not make it go off your credit report.
If you need further information, or want to further understand credit terms, you can go to myfico.com.
