Raise Your Credit Score

Raise Your Credit Score
Credit scores are complicated things. Most everyone uses your FICO score generated by Fair Issac Co. The FICO score, however, is not the only risk score and the three major credit bureaus use different models combining various scoring models. This does not mean much except to explain why your scores from different agencies might be different.

Your FICO score takes into consideration many different things. Specifically your score breaks down into the following sections:

  • Payment History 35%

  • Amounts Owed 30%

  • Length of Credit History 15%

  • New Credit 10%

  • Types of Credit in Use 10%

The quickest way to raise your score is to GET RID OF DEBT and PAY THINGS ON TIME.

Short of doing that, it’s just a waiting game. The longer you have your credit history (assuming you are paying on time) the better your score should be. The longer you have your credit accounts, the better off you are.

So what can you do to raise your score?

Avoid closing your credit cards unless you have to. Just lock the cards away in a safe and use that available credit to boost your score in the Amount Owed section. Avoid using the card, otherwise you might find yourself in debt. If you are tempted to use it then cut it up, and keep it in a safe place.

Along the same lines open up a few credit lines. Having too few credit lines can hurt your score since you do not have much credit available to you. It also limits the ability to track whether or not you can manage your debt and the number of opportunities to prove you can pay on time.

Negotiate for higher credit limits. Your credit score ignores the interest rates on your loans. If you do not need to negotiate lower rates to help you pay off a debt faster, then try to negotiate higher limits rather than lower rates.

Pay off debts intelligently. If you have two credit cards with $5000 debt each and a $15,000 limit you have $10,000 debt out of an available credit of $30,000. Let’s say that one card has a higher rate. While moving the debt to the lower rate card is smart you hurt your score if you close the higher rate card. You now have $10,000 debt out of available credit of $15,000. KEEP THE CARD OPEN but make DARN SURE you do not spend on it (cut it up and throw it in the safe).

Get smarter debt like an installment loan. Revolving loans are dangerous since you can always accrue more debt (see above if you do not cut up that card). An installment loan (personal loan, car loan, mortgage, etc.) is a set agreement and usually does not easily increase. Thus credit scores like to see this kind of debt rather than credit card debt. Get an installment loan for $5000 or $10,000 and reap the higher scores. Again, however, cut up those cards and do not spend more! By the way, your available credit increased.

Avoid opening lots of new credit. While diversifying yourself and getting more credit is good, avoid opening lots of credit all at once. Each application lowers your score some and suggests you will be a credit risk since you could potentially rack up substantial debt quickly.

Get a business card. I will talk more about how to get a business card in future articles, but a business card USUALLY does not go on your personal credit report. The $10,000 debt you have could be passed on to your business (even if you do not actually have a business – you do, you just do not know it).

For more information see: myFICO Understanding Your FICO Score Booklet (PDF file)