Enhancing Your Credit Score

"We do not remember days, we remember moments.” - Cesare Pavese

Each year, companies you do business with order more than 10 billion FICO (Fair Issac COrporation) scores, which they use to determine whether to offer you services at all, and at what price.

A low FICO score can have significant real-world consequences. It can make it harder to obtain insurance, rent an apartment, or even get a new car. Understanding how your financial decisions impact your FICO score is therefore crucial.

On the other hand, an excellent FICO score can open doors to a world of financial opportunities. It can lead to credit cards that reward you for using them, new job prospects, and even investment opportunities. This is why it's important to strive for a high FICO score.

Understanding your FICO score and the factors that influence it is not just a financial necessity, but a powerful tool that puts you in the driver's seat of your financial decisions. It's about being an informed consumer, capable of navigating the complexities of today’s financial landscape.

Now, let’s dive into credit scores...

At its core, it’s simply a number that tries to represent the likelihood that you will pay back money that you borrow. Because banks and lending institutions use credit scores as a key component in their determination to lend money, it’s also a key element for individuals with nefarious plans – stealing a person’s identity allows your creditworthiness to also be stolen and used by the crooks.

FICO represents your long-term financial behavior, and while the actual number can be 'managed' to some extent, it's a reliable indicator of your debt repayment habits. This means that with the right strategies and actions, you can improve your score and open up new financial opportunities.

Different Bureaus, Different Scores?

Just as credit bureaus are individual companies, each bureau calculates scores in slightly different ways. In fact, it’s not unusual to see multiple credit scores originating from different bureaus – your FICO 2 score from Experian, used for mortgages, will be quite different from your FICO 8, used for credit cards, from Transunion. Obviously, this can be confusing for consumers, especially given the fact there are so many different ways to check your credit score online today.

Getting Clear on the Rules

The numerous variables from credit bureaus lead back to the majority of lenders' use of FICO. By taking an average from the primary credit bureaus, a FICO score represents a reliable average of an individual’s ability to repay a debt.

FICO does provide a generic, ballpark estimate of the factors that go into calculating your score:

• Your payment history: 35% of your score
• How much debt you owe: 30% of your score
• Length of credit history: 15% of your score
• The mix of different credit types you have (credit cards, mortgages, etc): 10%
• How much new credit you’ve recently opened: 10%

Again, these are just rough guidelines provided by FICO. They are far from exact, and the exact formulas for each score type are all trade secrets.

How to Raise Your Credit Scores

There are effectively only two ways to raise your credit score.

First, request a copy of your credit report from Experian, Equifax, and TransUnion and verify that all the information contained in them is correct. Often, an error can negatively impact your credit, and mistakes do happen. According to the Federal Trade Commission, 1 in 5 Americans has at least one error on their credit report, and about 5% of people have a “serious” error on at least one credit report.

So, pull copies of your reports (available for free from AnnualCreditReport.com) and scour them for errors. Then, you can open a dispute online with each bureau to start the process of cleaning up bad information.

Second, pay your bills on time and don’t overextend yourself on your accounts. A good rule of thumb is to carry a balance of no more than 30% of the total available credit on any credit cards you might have. This is called your utilization ratio, and plays into that 30% of your score mentioned above in relation to how much debt you owe. You demonstrate good use of credit by using less than 30% of the available credit on your credit cards. Get that number below 9%, and you’ll be in the “excellent” category.

As a final note, when you pay off a consumer loan, keep the account open rather than closing it. One metric is how long an account has been open and in good standing.

Resolve to reduce your consumer debt. Do an internet search “TOP FOUR STRATEGIES FOR REDUICING CONSUMER DEBT”. Choose one and take action this week.

BE THE ROAR not the echo®

Warmly, Janet