Tips for Raising Your Credit Score

FICO Credit Score

FICO Credit Score

Many people now find themselves with a poor credit score because of bad spending habits, too much debt accumulation or they have lost their job because of the GFC or other circumstances. It can be a difficult task to get that credit score back to where it was before financial issues popped up, but it’s entirely possible.

The first step to raising your credit score is to obtain a basic understanding of exactly what things affect your score. The FICO scoring model is used to assign a number rating to a person that represents their creditworthiness. Essentially the number represents the likelihood that you will pay back your debts.

The lower your FICO credit rating is, the more expensive it will be when you obtain new loans or credit cards, because the financial companies realize that it’s a greater risk to lend to you.

The makeup of the FICO score

Let’s take a quick look at the exact makeup of the FICO score assigned to debtors. The exact formulas aren’t made public, but FICO has released some general basic guidelines for how the score is calculated.

Payment History – 35%
If you have a habit of paying your bills late, this could be impacting on your credit score. That includes credit card bills, your mortgage, car repayments, utility bills and more. Paying bills on time will improve your FICO score, and your payment history makes up 35% of your FICO score.

Credit Utilization – 30%
This is the ratio of your current debt to the total remaining credit. So if you have 3 x $5000 credit cards and they are usually close to maxed, you would have high credit utilization ratio. You can improve your FICO score by simply paying back the debt so there is more room available on your credit cards. You could also apply for a higher credit limit which would drive down your credit utilization ratio.

Length of Credit History – 15%
As you gain a more comprehensive track record of financial transactions, it will affect your FICO rating. So if you have been paying your bills on time for 10 years, that will reflect positively on you.

Types of Credit – 10%
There are various forms of credit including mortgages, consumer finance (like many retail outlets offer), installment repayments on personal loans and so on. If you have demonstrated that you have paid a wide variety of forms of credit on time, it can positively affect your FICO rating.

Recent Searches for Credit – 10%
When you make an inquiry about obtaining another loan or credit card, it is considered a “hard credit inquiry”. Too many of these can negatively impact FICO scores. So if you apply for 3 new credit cards in a 2 month period, it can negatively affect your score.

So by understanding these basic elements we can draw the simple conclusion that paying your bills on time, having a low credit utilization ration (plenty of spare credit), having a diverse range of credit types, and by not applying for more credit too rapidly – you should have a good FICO score.

You shouldn’t continue to obtain new credit cards if your current ones are maxed. It is better to increase the credit limit on your existing cards than it is to make numerous hard credit inquiries while your current cards are full. You are much better using a single card with a high limit than juggling multiple cards with high credit utilization ratios.

Another tip for improving your FICO score is to register with companies that provide credit alerts. You will receive notifications about changes in your credit score, so you will quickly realise if your behavioral changes are paying off.

The sooner you take action on improving your credit score, the sooner you will be able to benefit from low interest rate loans that will improve your financial situation greatly!

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