By Jen Zeberkiewicz
Every time Jane goes shopping, she saves on her purchases by opening up a new store credit card. She thinks those percent off deals really add up so, she'll often spend as much as the new limit on the card.
Don't know what a FICO score is? Read Part One of this series on FICO scores.
Those "open-up-a-credit-card-instantly" offers may seem like a good idea but they're not. Every time a company pulls an inquiry on Jane's credit report, it may lower her credit score and when it's compounded with her maxed out credit, it's bad news for Jane.
Ashley enters her credit union and asks for a loan to purchase a new car. She's approved for an $18,000 new auto loan with a payment of $626 per month. A week before, her best friend Lynn got the same car and loan but Lynn's monthly loan payment was $552.
Ashley's monthly payment may not seem super high but over the life of the loan, she'll pay $2,657 more in interest than Lynn. Why? Apparently, Ashley didn't always pay her last auto loan on time and she's maxed out most of her credit cards. Her FICO score of 600 reflects these factors whereas Lynn's FICO score is 730. Lynn's score reflects that she always paid her loan on time and has two credit cards, with low balances.
There's good news for Ashley and Jane. A FICO score does not stay the same forever. In fact, the FICO calculation emphasizes recently reported information than older information, according to Barry Paperno, Consumer Operations Manager at Fair Isaac Corporation.
Paperno said there are many ways to improve a credit score. But just to be clear it's important to know that raising your FICO credit score is like learning how to tie your shoes. It takes a while and there are a few ways to do it. The best advice is to keep them tied and check on them every now and then so you don't trip.
your credit report
The first step to increase your FICO score is to get an up-to-date copy of your credit report from either one, two, or all three credit reporting agencies. You are allowed one free copy per year from each bureau by visiting the government sponsored website, http://www.annualcreditreport.com/.
Your FICO score is based on information obtained from your credit report so you'll need to see where there may be some negative information (such as late payments). These areas (payment history, amount owed, length of history etc.) represent where your score could be higher.
Then, with the trade lines (for example, accounts and loans) you already have, follow these steps to increase your FICO score:
- Pay on time - one day late has the same effect as 29 days late Delinquent payments and collections can have a major negative impact on your FICO score.
- Keep credit card balances low in regard to credit limit (Paperno said balances should ideally be 10 percent of the total credit limit, and not go over 50 percent). If you have five credit cards, spread out the purchase rather than maxing out one card. Pay off debt rather than moving it around.
- Only open new accounts if absolutely necessary. However if the deal is too good to resist (and I don't mean just a 10 percent off shopping spree) a new credit card generally takes only six months to recover any damage from a new trade line, Paperno said. Also, for young adults who just opened their first credit card: don't open a lot of new accounts too quickly, as rapid account build-up can look risky to a lender.
- Credit cards aren't a "no-no" - but manage them responsibly. In general, having credit cards and installment loans, such as fixed rate auto or personal loans, will raise your credit score. A young adult with no credit cards by the time they are 30 for example, tend to be higher risk than someone who has managed credit cards responsibly.
- Check your credit report for any mistakes which could decrease your score. One incorrect key stroke entry or someone else's information could be on your credit report which could negatively affect your score. If you find a mistake, file a dispute through that particular credit bureau (the address and other contact information is on your credit report.) Both the credit bureau and the furnisher of the information are legally obligated to investigate your dispute.
- If you are having trouble making ends meet, contact your creditors. They may be able to offer you a more manageable interest rate or offer you an extended time to pay off your loan. This won't improve your credit score immediately but it will avoid making your score worse.
- Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines.