Last Updated: January 21, 2011
No matter where you go or what you do, there's likely to be a score. It's true in sports. It's true in the world of academics. And, it's true with regard to your credit.
There's a score associated with your debt and debt-paying history. In most walks of life, you know what you need to do to improve your score. But that's not necessarily the case when it comes to improving your credit score or what's called your Fair Isaac Corporation (FICO) score. Knowing how your credit score is calculated and then figuring out how to improve that score seems a bit of a mystery. In the case of the former, there are plenty of resources that address how your credit score is calculated. In short, 35 percent of your score is based on your payment history; 30 percent on the amounts owed; 15 percent on the length of credit history; 10 percent on the type of credit used; and 10 percent on new credit (the number of accounts you have recently opened).
In the case of how to improve your FICO credit score, financial planners suggest that you do the following:
- Use personal finance software or online banking services. "Software and online banking can give your financial life some order and help you avoid missing payments," said FPA member, Tom Gartner, CFP®, of Independent Service Company, Inc. Missing payments affect one of the largest aspects of your credit score — your payment history.
- "Be careful about applying for store credit cards in order to get an immediate discount at the register," said FPA member, Adi Toth, CFP®, of The Ruhl Financial Group. "Applying for too many credit cards or having too many will have a negative impact on your credit score which might outweigh the one-time savings gained from applying at the register to get a discount," Toth said. If you carry a balance on a credit card, it should be no greater than 50 percent of your credit limit. "Either pay the balance down or increase the limit," said FPA member, Michael F. Meara, CFP®, of Pacific Mountain Advisors, Inc.
- "If you have small collections for health care or a mobile phone, make sure those are paid," Meara said.
- "Consolidate your home equity line of credit (HELOCS) into a primary mortgage or increase the line of credit so the outstanding balance is less than 50 percent of the line," said Meara.
MyFico.com recommends the following ways to improve your FICO score:
- Pay down your credit card debt to zero and your score can go up by as much as 20 points in 60 days.
- Get a copy of your credit report and look for errors. This may include payments that appear as late but you can prove were paid on time, accounts that aren't yours, and old debts that shouldn't be on your report anymore (i.e., negative debts that should be taken off your report after seven years and bankruptcies that should be removed after ten years).
- Maintaining multiple credit cards may help you in some circumstances. It is better to have four cards at 20-percent to 30-percent capacity than to have one card that's maxed out.
Learn more information about your credit score.
Learn more about repairing your credit at the Federal Trade Commission Credit Repair website.