You and Your Credit Score Part II: Improving FICO
Knowing how your FICO score works is just the first step in learning how to improve your score. These five tips for healthy credit management may help you improve your score, whether itâ€™s a low 300 or a mid-range 450, to an ideal 700 or a near perfect 800:
- Make your payments.
- Keep your debt to a controllable minimum.
- Avoid canceling cards or closing lines of credit.
- Only open new lines of credit when absolutely necessary.
- Pay off your debt, donâ€™t just move it around.
Lenders are most concerned about your payment history and if youâ€™ve had any delinquencies, any collections, or a foreclosure. Being consistently 30 days late on your payments, alone, could drop your score by as much as 100 points. If you anticipate being late on a payment, contact your lender in advance to let them know and see if theyâ€™ll work with you to come up with an alternative solution so that you can still make your payment.
Most financial experts recommend that you keep your debt balances low, to no more than 30â€“35 percent of your credit limits. The closer your accounts get to their credit limits, the lower your FICO score will be. Keep in mind that you can also be penalized for maxing out your credit cards, even if you pay the balance in full every month.
Length of history on your credit accounts is factored into your credit score, so donâ€™t cancel a credit account even if youâ€™re not actively using it, especially if youâ€™ve had it open for a long time. If you have numerous accounts open that arenâ€™t in use, make it a point to request a credit report at least once a year to check for any discrepancies or fraudulent activity on those accounts. You can get a free copy from each major credit bureau at annualcreditreport.com.
Although a small percentage of your FICO score is the mix of credit you have in your name (credit cards, personal lines of credit, installment loans like mortgages or auto loans), you shouldnâ€™t apply for unnecessary credit in an attempt to improve the variety portion of your score. In general, try to avoid opening new credit accounts at least 18 months prior to applying for a loan. Lenders may see too many credit applications as an indication that youâ€™re about to take on a lot of debt. Your credit score would be better served by paying down the debt you already have.
Balance transfer offers that come with low interest rates can be attractive, but unless you actually use the offer to pay off all of your debt, the shuffling of your debt from one place to another isnâ€™t going to positively affect your credit score. In fact, transferring balances could negatively affect the ratio of your total credit card balances to your available credit lines and could hurt your score.
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