So you’ve ordered your yearly credit report, and you now have questions… Why don’t you have a perfect FICO Score? I mean, you have never missed a payment, never been late paying your rent, mortgage, car payment, even those minimum due amounts on your credit card payments… so why don’t you have a perfect 850 FICO Score?
Here are The 5 Factors that Determine Your FICO Score
Payment History is the most significant impact on your FICO Score. It makes up about 35% of your overall score, and even just 1 MISSED OR LATE PAYMENT can lower your FICO Score up to 110 POINTS!!!!! OUCH, right?
Amounts Owed is the second most substantial impact on your FICO Score. You can be diligent on making your payments on time each month, but here is where how much debt you have, or in other words, the outstanding balances or amount owed, can make up about 30% of your score. So that being said, having a ZERO balance isn’t a necessity for having a high FICO Score, but owing less is ALWAYS BETTER!! Mortgages, Auto Loans, Credit Cards, and Installment Loans are a great mix of credit types that show you how you manage your finances each month. Also, how much you owe versus the original amount is a crucial factor as well.
Length of Credit History is just as it states. Your FICO Score takes into account how long you have been using credit. Although having a short credit history is not bad, so long as you have no late payments showing and your revolving credit accounts have a low balance. You may have heard this term described to you as having “Thin Credit” It makes up about 15% of your FICO Score.
New Credit tells potential lenders how many times you had applied for “New Credit” recently (usually within the past 12 months) and also when the last time was that you opened a new account. This type generally affects about 10% of your FICO Score. These show on your report as a “Hard Inquiry” and can affect your FICO Score up to 15 points for each one. However, rate-shopping and multiple inquiries related to an auto or mortgage lender will basically be counted as a single inquiry since the assumption is that consumers are rate-shopping—not planning to buy multiple cars or homes.
Types of Credit in Use is the last determining factor of your FICO Score. It’s a minimal component of your score, about 10%. Basically, what this does is determine a mix of the different types of credit that you have displayed on your report and how many total accounts you have. For instance, credit cards, auto, mortgages, installment loans, even store credit.
Determining what negative is affecting your FICO Score
Did you know that even ONE (1) late payment can lower your score up to 110 POINTS!!! YIKES!!!! Below is a simple layout of the different hits your FICO Score can take, and by how much those mistakes can affect your overall score.
Debt Settlement can lower your score up to 110 points. This is when you hire a company that helps you consolidate all your debt and contacts your creditors on your behalf to try and make a settlement for the debt to be paid. This shows potential creditors that you were not able to manage your finances on your own and needed the help of a professional.
Collection Accounts are just as damaging to your FICO Score, not to mention the drastic measures they use in trying to collect that debt. Again, anywhere up to 110 Points can drop off your score once a collection account is reported. Your best bet in this situation is to contact the original creditor and make arrangements with them to pay the debt and possibly report to your credit as paid as agreed.
Bankruptcies can help a person eliminate or create a repayment plan for their accumulated debt; they can no longer pay. Although most look at this process as a “fresh step” or “Clean Slate” but in reality, it’s going to cost you a whopping 240 point drop in your FICO Score and remain on your report from 7 years up to 13 years depending on the Chapter you file.
Foreclosures/Repossessions are hard enough without the added impact you take on your FICO Score. As if you aren’t already having a financial hardship as it is, you are now taking a 160 point hit on your score. Try reaching out to the lenders and making an arrangement. They want you to stay in your home and vehicle, so try that avenue first before allowing it to affect you even more in the long run.
What does NOT affect your FICO Score?
- Marital status
- Your Age (though FICO says some other types of scores may consider this)
- Race, color, religion, national origin
- Any kind of public assistance
- Occupation, employment history, and employer (though lenders and other scores may consider this)
- Demographics, Where you live
- Child/family support obligations
While only time and good credit habits will boost your credit score dramatically, if you are close to your desired level, there are some things you can do now to improve your credit score over a few months.
Simple Steps EVERYONE Can Take to Help Improve Their Credit Score
Bring any past due accounts current
- This is SO important in fact, it’s the most crucial factor to keep in mind when it comes to your credit score and improving it.
- You never want to miss a payment on any bill, credit card, store card – nothing.
- Building a history of on-time payments will really help improve your score so don’t let a dumb late bill mess you up.
- If you’re forgetful, set a reminder for each bill every month and when it pops up, pay it right then.
- 3 late payments I didn’t know about followed me around for years so I have reminders and sticky notes for EVERYTHING.
- Make it a priority!
Once your accounts are current, they will start to impact more positive data to your report moving forward. The late payment you had, will still show up on your report, but the impact on your score lessens the more time that passes.
Pay off any collections, charge-offs, or public record items such as tax liens and judgments.
If you have any small collection, charge offs or such items you owe, get them paid off as soon as you can. The less you owe, the better! By doing this, it will demonstrate that you paid what you owed, better late than never, right? Absolutely! If you have a listed charged off, make sure you can pay it in full before paying it. The reporting clock starts ticking on the collections process again, and the item will stay on your account for another seven (7) years.
Reduce balances on revolving accounts
One of the easiest ways to quickly boost your credit score is by paying down a credit card with a high balance relative to its credit limit. If you can’t pay down your balances, then you can have the same effect by requesting an increase in your available credit limit. All you have to do is call your credit card company and ask for a boost to your credit limit. Have an amount in mind before you call. Make that amount a little higher than what you want in case they feel the need to negotiate. That being said, you MUST have enough self-control to not use up all of the increased credit, or you will be going backward and not forward, even possibly making your situation worse. For the best possible credit scoring results, it’s recommended that you keep any and all revolving debt below at least 30% and ideally 10% of your total available credit limit. As Always, the lower the amount of debt, the better!
Apply for new credit ONLY when necessary
Shopping around for credit cards, mortgages, or car loans can really impact your FICO Score. Most hard inquiries that matter is those that happened during the past two (2) years. But, while you are in the process of trying to raise your credit score, DO NOT apply for any new sources of credit.
Dispute errors on your credit reports
When you get your credit reports, if you see any mistakes, you need to take steps to fix them immediately.
To dispute the entry, you’ll need a copy of your most recent credit report.
Next, find the error and look at every detail to ensure that everything is entirely correct. The key here is to be VERY specific. If anything you see on your report is not accurate, you have the right to dispute the entire entry.
Here are just a few details that you should verify are correct:
- Account Numbers
- Creditor Names
- Open Date
- Charge off Date
- Payment History
If you find any information that isn’t correct, you need to write a letter to each of the 3 credit bureaus, TransUnion, Equifax, Experian, indicating that there is incorrect information on your report that needs to be corrected or removed. You should list the wrong information in your letter.
If the information you are disputing can’t be verified within 30 days, they’ll have to either correct it or remove it from your report. Many times the information simply can’t be verified, and the entry will be removed. There are some instances where you will see it removed, and then it shows back up after 45 days. This is because the creditor was able to verify the information as requested, just not in the allotted time frame.