Yahoo Finance 5 Simple Tricks for Boosting Your Credit Score
The FICO credit scoring model is the most widely used by lenders in the United States. Unfortunately, the formula used to calculate your FICO score is a well-guarded secret, and there's no way of knowing how much any specific credit behavior could affect you.
However, we do know the basic composition of the FICO score, and we can use it to our advantage when trying to improve, maintain, or maximize our scores. With that in mind, here are five tips, based on what we know about the FICO formula, that you could use to boost your own credit score.
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Pay all of your bills on time
This first one isn't really a trick, but it's so important to your credit score that it's worthy of a brief discussion.
Despite what certain "credit repair" businesses might tell you, there's no shortcut to excellent credit. While there may be some ways to quickly boost your score by a small amount (we'll get to those in a bit), the most effective way to build credit is responsible financial behavior over a long time period.
Not surprisingly, the most important component of your FICO credit score is your payment history, which accounts for 35% of the total. Therefore, the most effective thing you can do to build your credit score over time is to pay all of your bills on time every single month.
Pay off some debt
The second most important category of information in your FICO score is "amounts owed," which accounts for 30% of the formula.
Here's the key point you need to know about this category: The actual dollar amounts you owe are not the most important factor. In other words, a $10,000 debt isn't automatically worse than a $1,000 debt.
Instead, what really matters is the type of debt, as credit cards and other revolving accounts are generally considered to be worse than installment debts like mortgages. Additionally, the important number is the amounts you owe relative to your credit limits or your original loan balances.
Paying down debt can certainly have a big impact, especially if you have a significant amount of credit card debt. Your balance as a percentage of your total credit line is known as your credit utilization, and experts generally agree that credit utilization of more than 30% can be a major negative factor.
Ask for higher credit limits
If you can't afford to pay down enough of your credit card balances to have the desired effect on your credit score, another strategy to try is to ask your credit issuers to raise your credit limits.
Think about it this way: If you owe $2,000 on a credit card and have a $5,000 limit, you're using 40% of your available credit, which is likely weighing on your FICO score. On the other hand, if your limit is raised to $8,000, your credit utilization immediately drops to 25% without paying off a dime of your debt.
To be clear, paying down the debt is definitely the preferential way to lower your credit utilization from a long-term financial health perspective. However, the combination of paying down some of your debt and requesting higher credit limits can have a bigger positive impact than just paying down as much debt as you can afford.
Keep old accounts open
It might seem like getting rid of older, unneeded credit accounts would be a positive catalyst to your credit score. After all, wouldn't having fewer accounts make you less of a risk to get over your head in debt? However, the opposite is often true.
Here's why. The length of your credit history is a not-insignificant 15% of the FICO scoring formula. Closing your old accounts will take away some of the most positive aspects of this category.
Just as one example, the average age of your credit accounts is a component of this category. Let's say that you have four credit cards -- one that's a year old, two that you opened three years ago, and one that you opened 10 years ago but don't use anymore. Currently, your average credit card account is 4.25 years old. If you decided to close your old and unused account, however, this average would drop to just 2.33 years and could hurt your FICO score.
In addition, closing the account would reduce your overall available credit, which could make your credit utilization look higher, hurting your FICO score in the "amounts owed" category as well.
On the other hand, keeping your old accounts open will have the effect of boosting your "length of credit" history category. Plus, it doesn't hurt to have a credit line with 0% utilization on your credit report.
Don't apply for credit for a year
As I mentioned earlier, excellent credit takes time. One way that you can use time to your advantage is by maximizing the impact of the "new credit" category of information, which makes up 10% of your FICO score. Obtaining or applying for new credit is generally seen as a risk factor by lenders, so the fewer items that can be considered new credit, the better.
The new credit category contains two types of information -- the newly opened credit accounts on your credit report and the times you've applied for credit recently (credit inquiries).
Here's the point: While your credit report lists all inquiries that have taken place over the past two years, only inquiries from the past 12 months are considered in the FICO scoring formula. So by not applying for any new credit accounts for a full year, you'll naturally maximize this portion of your score.
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