Ways to Improve Credit Score

Common Sense Methods to Improve Credit Score

How to improve credit score? In our previous article on Understanding FICO Score, we touched on five main factors that affect your FICO score. These are :
  • Payment History
  • Amounts Owed
  • Length of credit history
  • New Credits
  • Types of Credits Used

There have been lots of articles written on how to improves your credit score. According to MyFico.com, which is run by Fair Isaac, the firm that invented FICO, there are just a few basic things to do. Most are pretty common sensical.

With regards to payment history, make sure you just simply pay your bills on time. If you are late once, do not be late again. Stay current on all payments. Any collection accounts stay on your credit report for 7 years. Hence, just to reiterate, be current on your bills.

With regards to amount owed, keep your balance low relative to your available credit. Hence, if your credit limit on all your credit cards is $20,000, carrying a balance of $2,000 is preferable than carrying a $15,000 balance. MyFICO also suggests paying off your debt rather than moving it around. They also suggest not to close unused credit cards as this may lower your score because it affects your utlization rate - ie amount of balance you carry versus your available credit. Closing your unsed credit cards lowers the available credit you have. However, opening too many new credit cards simply to increase your available credit limit may also backfire.

For those with a short credit history, MyFICO suggest against opening to many lines of credit too fast. So if you want to get an American Epxress, a Visa and a Mastercard, space out your application over a certain period of time.

With regards to new credit, MyFICO suggests that when you are shopping around for a new loan to do it within a short time frame. Credit bureaus do recognize that when you are shopping for a mortgage or auto loan, you need to sniff around to get the best rate. Though they frown upon people apply for too many credit cards too soon, they will recognize that you are shopping around for best rate when you are applying for some other loan.

If you have bad credit history, opening new accounts and paying your bills time and responsibly will improve your score in the long run.

Under the types of credit used category, MyFICO suggests against opening new accounts just to "get a better credit mix". Open new accounts only when you need to. Having a credit card and using it responsibly is better than having no credit cards. So if you only believe in using cash, think twice and get a credit card. Another tip they gave is that closing your account will not make it go away. It stays in your credit report.

In sum up, these are the few basic things MyFICO says you can do to improve your credit score. Even if you did not read this article, it all boils down to three basic things.
  • Pay your bills on time - if you are always having problems, set up automatic payments from your bank account
  • Do not have any debt if possible and if you have debt, reduce it rather than add to it and move them around
  • Do not apply for credit if you do not need one - if you do not have many credit cards for example, you would never face the situation of asking yourself if you should close these accounts or not
  • If you are looking to get a new loan, shop for it within a short time frame

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