How A Credit Score Is Calculated
Before we discuss how to raise your credit score, let’s take a quick look at how it is calculated. The major determinants of credit score are the following:
35% --> On time (or late) payment of financial obligations and debts
30% --> Ratio of current revolving debt (ex: trade line balances) to the total available revolving credit (ex: trade line limits)
15% --> Length of credit history
10% --> Types of credit used (installment, revolving)
10% --> Credit levels from past
Arriving at your overall score is based on the previous formula, although there are steps you can take to augment these variables. Letís take a look at each variable with a focus towards what is in your power to help you raise your FICO score.
On time (or late) Payment Of Financial Debt
Making sure you pay your bills on time is extremely important when it comes repairing bad credit. Any payment that is more than 30 days late can affect your score. (Note: if you get a bill on the 1st of the month but it doesn’t come due until the 15th, it does not become 30 days late until the 15th of the following month.) Once a bill is 30 days past due, the issuing creditor can report this information to the credit bureaus. Typically, however, creditors will not report damaging information to the bureaus until 60 to 90 days after it is past due.
If a borrower has limited funds one month and must decide on whether to pay Bill A or Bill B, the smart move (less damaging to your score) is to pay the higher of the two. Also, avoid declaring bankruptcy as it will affect yourscore for at least 7 years. The better move for most borrowers is to work with a credit counseling service that can help improve your score.
Lower Your Ratio of Revolving Debt
If you can stay between 10-30% of your maximum credit limit on each trade line, and you do not exceed 50% on any trade line, your FICO score will not be adversely affect. This can be difficult, especially when you are transferring debt to low interest credit cards or must make a large purchase using these trade lines. From a credit score perspective, lowering your ratio of revolving debt will lead to a higher score than consolidating everything into one trade line.
A good move is to convert as much revolving debt to installment payments at least 45 days prior to making a large purchase such as a car or buying a home.
Maintain 3-5 trade lines in order to establish credit, establish your ability to make monthly payments and to boost the amount that mortgage lenders are willing to extend to you
One way to begin to establish credit is to become an authorized signatory on a parent’s tradeline. As long as the minimum balance is paid each month, the signatory’s credit will be established – even if they do not personally use the card.
Be able to access tradelines online or at least through monthly statements. This is especially true for student loans, which are notorious for being reported multiple times – creating the appearance that a borrowers monthly payment obligations are higher than they really are.
If you plan to make a large purchase or takeout a large loan, avoid checking your credit multiple times as this will slightly lower your FICO score. The best move is to ask for a copy of your FICO score from a mortgage broker, for instance, if they are going to pull your credit. Each subsequent financial institution will accept your copy if it has been made within the last 30 days.
Length and Levels of Credit
Both the length of time that you have had your lines of credit, as well as the amount extended to you, will affect FICO score. Length of time is important for credit agencies as it reflects a stability in your relationship to creditors. This is why it is a good idea to hold onto tradelines that have high limits and have been open for many years as they look good to creditors and improve your ratio of revolving debt.
Levels of credit is important because it shows that you generate income -- the higher your income, the more credit will be extending to you. This may come in very handy when you are looking to make that first big home loan.