FICO Credit Score – How to improve a Credit Score to get Lower Interest Rates

April 25th, 2006

FICO Credit Score affects Interest Rates

The FICO credit score is used as a reference by financial institutions to help determine what risk is involved with lending money to you. Depending on the score, you will get either approvals or denials and also lower interest rates or higher interest rates. By improving your FICO credit score you have a way to get lower interest rates on credit cards as well as on home loans.

You need to contact all three credit reporting agencies. They are Experian, Equifax and TransUnion. Most people know that all credit card companies report to these agencies. The agencies also take information such as automobile and home loans as well as any liens or court ordered payments, such as child support. You may even get a negative report if you fail to pay doctor bills. You could potentially have negative items on your credit report without even being aware of it.

The FICO credit score starts with a number 300 which is the worst to 850 which is considered a perfect score. The lower the rating the more interest you will pay on your credit cards and also you will pay more interest on an automobile or home loan.

Find out what your credit score by getting a copy of your credit report. You can either go directly to the agency to get an annual free copy or you can sign up with a credit protecting company that sends out quarterly reports. If you want to improve your credit score you should consider signing up with the credit watch services. Almost all major credit cards offer this service credit protection service. You can expect around $9 a month for the service. But you will also be notified of any inquires or changes that can affect your credit.

If your credit score is above 700 you are doing pretty good. If you achieve a credit score of 760 or better you are at the lowest interest rates typically. If your credit is rated below 600 your interest rates are going to be much higher. Also if your credit score falls below 600 you could be denied credit or a loan because of a bad credit score. Improving your credit score will let you get lower interest rates with your credit card company. If you refinance a home loan you can also lock in a lower rate as well.

The best ways to improve a credit score is to make sure to never be late paying your bills. If you are consistent paying your bills every month without being late you could raise your score up by 20 points.

If you have a lot of credit cards that have hefty balances that are not being paid off it will cost you your credit score. You could lose as much as 70 points if you have unpaid balances on your credit cards. If you can refinance with a home loan, this is one way to correct your credit score. However it is the dilemma of getting the good rate on your home loan that leads you around in a circle. Best bet is to tackle the debt and get rid of it once and for all. Budget your expenses, pay more than the minimum payment and in time your credit score will improve.

Having too many credit cards open is not really a good thing as far as your credit score is concerned. You shouldn’t open more new credit card accounts that you do not plan to use because it will hurt your credit score by up to 10 points. There are recommendations by financial planners that say that you should only have 3 credit cards. If you have more than 3 credit cards you are likely going to get into problems with credit card debt. If you already have too many credit cards accounts open, you might want to just ask to lower the limit instead of closing the account. Showing that you have long term open credit in good standing can be a positive on your credit rating. Closing the accounts could hurt your credit score. The cards don’t disappear off of your credit report card when they are closed so be careful how many credit card accounts you decide to open. The closed cards still can be factored into your credit score.

Avoid applying to multiple credit cards in a short duration of time. Try to space the time between applying to a card around once every year. If you apply for too much credit too quickly it can hurt your credit score. You can however apply for a home or automobile loan at multiple banks in a short period of time without being penalized in the same way as the credit card companies do. The credit score will treat the home or auto loan search as one inquiry to your credit report.

Having no credit cards could hurt your credit score. If the reporting agencies do not have a record of your ‘responsibility’ with credit they will not be so willing to offer you credit. If you cannot get a credit card set up, you can always buy from a company that allows payment plans. Once you show that you have a history making payments you will register on the credit reporting agency scale. You can usually then expand to getting a credit card and working into a home loan.

The breakdown of the FICO credit score is as follows: Payment history 35% of the score, Amounts owed 30%, length of credit history 15%, new credit 10%, types of credit used 10%. Focus on paying off the credit card debt first and make sure you make your payments on time every month. These two goals are probably the most helpful ways to improve your credit rating. Credit scores changes as you practice responsible financial habits. If your credit was bad a year ago and great today, the lenders look at what your score is today. Things such as bankruptcy and debts that you are delinquent on will stay on your record for 7 years so be careful what you do with your credit.