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Ways to Improve Your Credit Score

Your FICO score impacts major aspects of your life. As the economic marketplace and lending requirements become stricter, it is important to understand – and improve – your FICO score. Interestingly, although your FICO score is simply a mathematical calculation of your creditworthiness, your credit score impacts a significant portion of your life:

  • Interest rate: Your credit score influences the interest rates you obtain, which can result in a difference of thousands of dollars in the long-term picture. The difference in interest rate payments between a mortgage for 5.3% and 6.9% is drastic. The lower your FICO score, the more interest you will pay.
  • Personal loans: The strength of your FICO score determines whether you qualify for mortgages, car and personal loans. If your FICO score is low, then you may not qualify for any personal loans, or you will be subject to significantly higher interest rates.
  • Housing options: Having good credit influences whether landlords or property managers rent to you, with nearly 70% of landlords running credit checks during the application process.
  • Insurance premiums: Increasingly, your FICO score has bearing on your life insurance, car insurance, property and renter’s insurance premiums. The lower your FICO score, the more risk you pose to the insurance companies, and thus, you are subject to higher premium costs.
  • Employment outlook. Since 2001, a large number of companies – especially larger corporations – have included reviewing your credit score as an important part of the application process. Your credit score is considered to be a valuable, tangible factor in determining your financial responsibility, which is an important element for employers.


    • Elements that influence your FICO score

    Your financial health, in terms of your risk as a borrower, is quickly summarized in your FICO score. Utilizing a statistical algorithm, your credit score is derived upon factors that provide an overview of your creditworthiness. Ranging from 300 to 850, higher numbers on your FICO credit score is better than the lower range.

    Your personal information does not influence your FICO score – but any negative public records, including judgments, liens, and bankruptcies, are negative factors. In addition, having third-party collections does not bode well for the potential of your FICO score, and even hard inquiries from credit card companies or banks can lower your credit score.

    Did you know?

    On a $216,000 home mortgage, an owner with a credit score between 760 to 850 pays $222 less per month than an individual with a FICO score of 620. For a 30 year loan, this adds up to nearly $80,000 in additional interest!

    Composition of Your Fico Credit Score

    Numerically speaking, your FICO score is most heavily weighted upon your payment history. Making your payments on time every month is certainly the most important factor of your FICO score.

    The next influential factor on your FICO score is how much debt you have accrued. The closer you are to the maximum limits on your credit cards, the lower your score will be.

    The longer credit history you have, the better this reflects on your credit score. Indeed, time is your friend – especially when it comes to developing good credit.

    Your applications for new credit also impact your FICO score, which reflects how many new accounts you have, the age of each account, and how old each credit inquiry is. Keep in mind that each time you apply for new credit, your FICO score is negatively impacted – with exception to mortgages and auto loan inquiries.

    Lastly, the mixture of debt you hold influences your FICO score. When you have a positive mixture of credit, including revolving credit and installment debt (such as car loans and mortgages), your score improves.

    How to improve your credit score

    With more than 30 million Americans facing poor credit scores (620 or lower) that impact their abilities to obtain reasonable interest rates, many people are scrambling to improve their credit score. Even if you have a decent credit score, improving your FICO score can literally save you thousands in better interest rates.

    As highlighted above, the once “secret” calculations utilized for your FICO score have recently been revealed, making it easier for you to improve your credit. There are six easy, convenient strategies you can implement to effectively raise your Fico score:

    Six Strategies to Improve Your Credit Score
    1. Check your credit report for errors – You should regularly order copies of your credit report and check them diligently for any reporting errors. Not only will this keep your score accurate, but you can quickly monitor and stop any signs of identity theft.
    2. Making your monthly payments on time - Considering that your payment history is the largest factor of your credit score, make sure that you submit all of your payments on time. If you anticipate missing your payment date, make sure that you speak with your creditor in advance; often, they can make exceptions for outstanding circumstances – meaning that the late payment will not be reported to the credit bureaus.
    3. Reduce your credit card debt, keeping balances low – Remember, your credit score is calculated based upon how close you are to your maximum credit card limits. If you are trying to optimize your FICO score to its fullest capacity, keep your balance on your credit cards below 10% of the maximum limit.
    4. Keep your old, good-standing accounts open – The longer credit history you have, the better your FICO score will reflect. With that said, if you have an old credit card that is in good standing, keep it open. Closing this card shortens your credit history, and it also may bring you closer to your balance / credit limit maximum. An unused, good-standing credit card is beneficial for your utilization ratio.
    5. Consider credit counseling – If you find yourself missing payments or overwhelmed by your burden of debt, you may wish to seek professional credit counseling. Non-profit agencies, such as the Consumer Credit Counseling Services, can help you negotiate lower interest rates – meaning you pay off your principal quicker. With recent changes in the Fair Isaac reporting formula, credit counseling no longer negatively impacts your credit score.
    6. Minimize the amount of new accounts you open – When you open a series of new accounts within a short period of time, this raises a warning flag for lenders – and it pushes down your FICO score. Each time you apply for credit, a hard inquiry is made on your credit report. Do not be enticed by department stores offering discounts or gifts on new credit cards, as your lowered FICO score will be impacted by these novelties.

    Considering that your credit score is an accumulation of your financial history, improving your FICO score takes time, as the changes will appear gradually.

    Putting your FICO credit score to work for you

    Having a strong credit score can be a tremendous asset for your financial endeavors, whether you are obtaining a mortgage or apply for a new job. If you are planning on applying for a large loan, such as a mortgage or auto, it is important to begin planning months in advance. Six months before your anticipated application, check your myFICO credit score. This will give you sufficient time to make any changes, such as lowering your existing credit card balances. In addition, ordering your myFICO score helps you keep track of your credit rating, and any significant changes can be a sign of identity theft.

    In addition, knowing your myFICO credit score can be a great negotiating leverage tool. When you empower yourself with knowledge, you can negotiate the best rates for your loans – saving you thousands of dollars in years to come.