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
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.
Credit Card Debt
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