Your credit scores are used by lenders to determine whether you are a credit risk. Many lenders use FICO credit scores, which were developed by the Fair Isaac Corporation. Lenders also use different versions of FICO scores. There is more than one FICO scoring model, some of which are used by specific creditors.
Multiple factors are considered when calculating your FICO credit scores. These factors include payment history, credit utilization, length of credit history, which types of credit you have and new lines of credit. Your base FICO scores, which range from 300 to 850, could help determine whether you can receive favorable loan terms. The higher your scores, the better the interest rates and the more likely you will be approved for credit
Late payments, defaults and an overuse of credit can lower your scores. Fortunately, credit scores are not permanent. You can always take steps to improve your credit scores even if they have decreased due to a difficult financial situation. These steps may include but are not limited to:
- Checking your credit report: You can receive free credit reports from the three credit reporting agencies (Equifax, Experian and TransUnion) once per year. Pulling your reports is an important first step because you must know what needs to be fixed. After all, your credit scores are calculated from information contained in your three credit reports. Your credit reports may also show incorrect information. You could boost your score by contesting errors on your credit reports.
- Making timely payments: Your payment history accounts for 35 percent of your FICO scores. You can improve your scores by paying your bills on time. Timely payments show financial stability. If you are forgetful, then you could use your smartphone or calendar to set reminders for payments. You may also be able to set up automatic payments through your lenders.
- Reducing what you owe: It is important to reduce what you owe if you have existing debts and are overextended on credit. If you have federal student loans, then you could temporarily utilize income-driven repayment programs to cut your monthly payments. The money saved by these programs could be used to pay down other debts. You can also improve your score by keeping low credit card balances. Try to keep your balances below 30 percent of your credit limit.
- Avoiding hard inquiries: When applying for a new line of credit, a lender will pull your credit history. This may result in a hard inquiry, which can lower your FICO scores. Understandably, it may be impossible to avoid a hard inquiry (if you are applying for an apartment lease). Hard inquiries could affect your credit scores for up to six months and may stay on your reports for two years. Be sure to weigh the risks and benefits of a hard inquiry beforehand.
- Guarding against identity theft: Identity theft can sink your credit score. In some cases, it may take months or years to clean up the damage. Some financial institutions offer services that alert you to unauthorized use of credit. You can check with your bank to see if these services are available, but they typically cost money.
Will These Credit Repair Tips Work for Everyone?
We only discussed general tips for improving your FICO scores. Depending on your situation, you may need to pursue other strategies. Someone with a lengthy credit history will be facing a different situation than someone with a short credit history. Remember, there are five factors that determine your FICO scores. However, there are some universal rules when it comes to maintaining good FICO scores. Make payments on time, keep credit card balances low and only open new lines of credit when needed.
A growing percentage of creditors also use the VantageScore model. This scoring model deserves its own future blog, so continue following our weekly updates.
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