Although there are several credit models, the most commonly used is FICO, based on a model created by Fair, Isaac Company. Their consumer website is myfico.com, and you can find information about the FICO credit scores there.
Your FICO credit score can be used to determine your interest rate and how much credit a lender will give you. So taking care of your score, and keeping your credit clean will save you money.
Getting and improving your credit score is not hard at all, just takes time. Here is a tip or two that will help you improve and increase your score.
FIRST: Get a copy of your Credit History
There are many reasons you may have no credit history. Maybe you're just starting out, maybe you pay cash for everything and have never needed a loan. In any case, if you have no credit history, your FICO score is likely to be low.
A fast and easy way to improve or start a credit history is to get a loan and pay it off on time. "Installment loans" are looked at as more important than credit cards. You will show a stronger score if your installment loans are paid up to date and on time then say a consumer credit card.
Another way to acquire a better credit history is to take $1000 and open a 6 month CD account at a financial institution. Now, get an installment loan for $1000, using that CD as collateral. Now, here's the trick. Take the $1000 loan, and open another 6 month CD account at another institution. Take another loan for the $1000 at the second institution. Do this one more time.
Let the CD's mature, paying only the minimum for the 6 months. Once they mature you cash them out and pay off all three loans. Congratulations...you now have a credit history.
SECOND: Maintain Your Good Credit History
Good job - you have paid your bills on time, and do not have high credit card debt. Here's some ideas to keep your FICO score as high as possible.
You don't need to close old accounts. (Unless you're being charged a fee to keep the account open.) Part of the FICO formula is based on the amount of credit available vs. how much you have used.
Another thing to be aware of is how you manage your money. Here's the scenario: you have a $2000 credit card. Every month, you charge about $1800 to that card. And, every month you pay it off. But here's what happens - your credit card company reports your credit information monthly to FICO. However if they report it on the day before you pay it off...the credit agency sees you carry a balance every month. If you can try changing the days you pay off your credit card.
THIRD: Fix your bad credit
Ok we all at some point have poor credit history. However you can improve your score. It takes time but can be done. If you're really unsure of the steps you need to take contact a credit counselor. You can find several good services offered online.
The most heavily weighted part of your score is based on your payment history. The first thing to do to start repairing your credit history is to pay your bills on time. The mortgage is the most important, followed by installment loans, and finally credit cards.
The next largest factor on your credit is how you have used it. You can improve it by paying off your credit cards.
At the end of all this, make sure you review your credit report. Get one report from all three credit agencies. Read every page. (I know it reads like stereo instructions in Greek) Look at the entries and call and contact the creditors to have them remove any errors.
Your FICO score is an important part of your financial life, and using these strategies may help improve your FICO score. Before making any drastic changes to your finances, consult with a financial advisor.
Pretty simple, huh?
Now let me explain why something so easy can have such a great impact.
Let's imagine you have 10 credit cards each with a $1,000 limit. So you have a total (or aggregate) credit card limit of $10,000.
Now let's assume that five of these credit cards are maxed out. In this case, you have a total (or aggregate) credit card balance of $5,000. Your balance-to-limit ratio is now 50%. You've used $5,000 of your $10,000 total credit limit. This is called your "revolving utilization." It's the total amount of your credit limits that you are currently using.
Being 50% utilized is considered high by most lenders' standards...and more importantly...by the creators of the FICO credit score.
But now watch what happens.
You pick up the telephone and ask for a credit limit increase on each of the five credit cards you haven't maxed out. Let's suppose each of the five lenders doubles your credit limit. So now you have 5 credit cards with a $2,000 limit and a $0 balance. But you also have 5 credit cards with a $1,000 limit with no available credit.
By increasing your credit limits you've just reduced your balance-to-limit ratio from 50% to 33%. And if you doubled the credit limit on the other 5 cards in this example, your balance-to-limit ratio would be 25%.
That's a significant decrease in your ratio!
Bravo! You've just increased your credit scores by making a few free telephone calls.
However, there are some potential pitfalls with this strategy. When you ask for a credit limit increase it will cause a credit inquiry...the type that lowers your credit scores.
So, to be safe, apply for all credit limit increases within a 14-day period. Here's why.
Credit Scoring Tip
When calling to increase the credit limit of credit cards issued by banks or credit unions, there's a good chance multiple inquiries will be counted as only one, minimizing the impact several inquiries could have on your credit scores.
In the past, you've seen me write about how, when you apply for a mortgage or comparison shop to buy a car, you should always do it within a 14-day period since mortgage and auto inquiries made within this timeframe count as only one inquiry.
Well, the same can be true when you ask your bank or credit union to increase your credit limits. This is the first time I've revealed this tip.
The reason this works is because the FICO credit scoring models can't usually distinguish why a bank or credit union is inquiring about your credit. In other words, there's no way to tell if the bank is inquiring about your credit in order to approve you for a mortgage or because they want to increase your credit limit. So it errs on the side of the consumer because you COULD be applying for a mortgage or auto loan from a bank or credit union. In this case it groups all inquiries within 14 days and counts them as only 1. This is very much in your favor.
But even if you do get stung by a few credit inquiries, generally your reduced utilization percentage will outweigh any negative effect of the inquiries'as long as you don't go on a shopping spree afterwards!
That brings me to the second pitfall...
Increasing Credit Limits is NOT a "Spend More Money" Strategy
If you go out and use up the newly available credit you'll be back in the same situation with your scores (and you will owe even more money). So don't make that mistake.
Think of your increased limit as overdraft protection on a checking account. You're not supposed to ever use it...but it's nice to have just in case.
Use this Technique to Increase Your Credit Scores Every Six Months
From personal experience, I've found that you can request that your credit limits be increased about once every six months'as long as you put yourself in a position to deserve an increase.
In order for the credit card companies to increase your credit limits, you obviously need a good payment history with them. If you continually make late payments or have a large balance, odds are they won't increase your limit. So keep this in mind when you ask for limit increases.
At minimum you should: pay your bills early or on time, pay more than the minimum amount due, and/or pay off your balance each month.
Both Doc Schmyz & Stephen Snyder are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Doc Schmyz has sinced written about articles on various topics from Real Estate, Property Investment and Finances. Doc Schmyz has invested in Real estate all over the country. His website gives thousands of investors up to date Get more info from acro. Doc Schmyz's top article generates over 22200 views. to your Favourites.
Stephen Snyder has sinced written about articles on various topics from Free Credit Report Score, Credit Card Companies and Credit Card Interest Rates. Stephen Snyder is the founder and president of the After Bankruptcy Foundation (http://www.AfterBankruptcy.org), a non-profit organization that provides free resources for helping people recover from bankruptcy (http://www.LifeAfterBankruptcy). Stephen is. Stephen Snyder's top article generates over 2900 views. to your Favourites.