Credit
Ways to Improve the FICO
Score
Since the method involved in
calculating the credit score is essentially nothing but a
complicated formula, one can change the
score by causing changes in the variables that are important factors in
the equation. There are several approaches to accomplishing this, some of
which are:
Credit
Counseling
Various credit
counseling organizations are available for consultation and the services
they offer are usually free of charge. Mortgage professionals however do
caution that using a credit counseling service may
negatively affect your credit report.
Credit
repair
There are many
credit repair organizations also that exist which offer their services free of
cost; however these organizations have been found to employ less standard
solutions. Hence, many websites recommend against using credit-repair organizations, since
they claim that the tactics adopted by these organizations are
illegal.
A typical example of such an illegal credit
repair approach is to obtain what is known as an Employee Identification
Number or EIN and use this while applying for a credit; this Employee
Identification Number is the same length as a Social Security Number and
is tied to your name in the same way. This practice is illegal however and
a blank credit report often looks just as bad as one with a derogatory
item on it. Some credit repair organizations claim to be able to
accomplish immense improvements in scores in very short periods of time.
The costs involved in these repair activities are usually prohibitively
high and the results are not usually guaranteed to be desirable.
Help
Yourself!
It helps to believe
that you can trust yourself and your intuitions to try and make things
better. Though professionals may have useful advice, there are a number of
ways in which the individual himself or herself can help oneself to
improve the FICO score. However, because the exact formula is not known,
the following suggestions are not guaranteed to be sure shot successes,
but nevertheless are likely to result in a better credit score:
Check Credit
Reports to Eliminate Flaws
This is the first
strategy to pursue in order to improve a FICO score as recommended by
almost every credit repair organization and credit bureau. Over and above
this, you could employ all or some of the following methods:
1. Get your free annual reports by
writing directly to the credit bureaus, or going to the website
www.annualcreditreport.com.
2. Locate any inaccuracies in your
reports; this often helps since credit reports have a notorious reputation
for having a substantial amount of inaccuracies. Check all bits of
information, not just information marked negative since even seemingly
harmless incorrect neutral information can weigh negatively on your
report. For instance, if your credit limit is stated incorrectly low, it
will appear that you are using a higher percentage of your total capacity
which would in turn lower your score.
3. Bring to the notice of the relevant
authorities and dispute these inaccuracies as soon as you can. You may
take the matter up with the creditors directly or with the bureaus.
Creditors often tend to have live operators while bureaus do not, so you
can choose as to whom it would be easier to for you to contact.
Many sources recommend
filing disputes with bureaus through certified return receipt mail and
prefer this mode over the one involving creditors. Disputes can also be
filed on the credit bureau's websites, although the options are not very
flexible on these sites. This generally works for information that is
genuinely bogus.
Punctuality
It is needless to say
that punctuality will help improve your FICO score. Although punctuality
may not help in the short term, over the course of some time, say a year,
paying bills on time will increase your score by roughly 30 points, and
more importantly, will prevent your score from dropping
further.
o Paying bills on time is important,
since any payments more than a month late will affect the credit score.
You need to note that a bill issued on March 15 with a due date of March
31 for instance, does not become a month late until April 30; however, if
you have the means to pay, it is best that you do so earlier rather than
later. Even a single late payment can result in a drop in your credit
score by over 20 points!
o Payments made after the due date
have an increasingly bad effect on your score, so it is best advised to
pay off late bills as soon as possible, you can also try negotiating with
service providers to have derogatory remarks taken off your report. In
addition to this, ensure your account does not get into the collection
department's lists since having such accounts are much worse than late
payments. Accounts usually go into collection status after about six
months of non-payment which means you have ample time to ensure you do not
enter this bracket.
o Set up as many automated payments as
possible since forgetfulness is definitely not reason enough to compromise
on a good credit rating! This will help avoid neglecting to pay a bill in
the future, one must however remember to maintain enough funds in the bank
account while making such payment commitments and also ensure that the
address for each of your accounts is updated from time to time. Payments
made via the internet are also much quicker and safer than relying on the
postal service to get your payments across in time.
o Paying bills before the due date
also helps better your score, since this will lower the total interest
charged, which in turn would reuduce your debt to credit limit ratio.
Removing
Derogatory Statements
o It is important that one never gives
up negotiating with collectors and businesses to remove any late payments
or collections statuses from a credit report. Often, collectors are more
than happy to take negative notices off a credit report in exchange for
prompt payment. It is also important for consumers to obtain any such
agreement in writing, since once the collectors have been paid off it is
next to impossible to have these derogatory statements removed.
o Be aware of the statute of limitations on
any debt you are attempting to clear by dispute and in such a scenario,
contacting a collector may be akin to awakening the proverbial sleeping dog. The
statute of limitations is defined as the period of time set by a state's
law, within which a creditor may file a lawsuit to enforce its legal rights.
Once the period of the statute has expired, the creditor can no longer sue
on the account.
For instance, if you live in California,
which has a four year statute of limitations on written contracts, and
your last payment was due on May 20, 2002, but you failed to make that
payment, it is advisable to wait until May 21, 2006 to contact the
collector to dispute, or attempt to negotiate the payment of a small
amount in an attempt to settle the debt and have them delete the account
from the credit agency records. In addition to this, if the creditors know
the statute has run over, there is a possibility that they may be less
inclined to even respond to a dispute. If this occurs, the credit
reporting agency must delete it from your record. It also helps to be
aware that in many states making even a small part payment on the account
or even, in some cases, promising to make a payment, may cause the
statute's time period to start all over again, which would not be the most
desirable of situations.
o It is common sense to realize that
businesses usually remove negative remarks in exchange for more business.
This tends to work best when the credit branch of the business is closely
connected to the sales branch, and when you happen to be a significant
customer. Businesses understandably, often have little interest in
preserving the accuracy of a customer's report for other businesses to
review.
o If you have federal student loans
that fell into default, it might help to pursue loan rehabilitation
policies. Labels of collection or default can be removed from a loan's
history with regular payments over the course of a year, however, this
needs to be arranged for ahead of time.
o Per-campus student loan programs do
often make exceptions and remove negative remarks if you manage to find
the right person to take care of this for you. A good justification for a
late payment like non receipt of the bill never hurts and might just see
you through, but also do remember that most excuses do not have legal
merit and you can surely expect responses which imply that it was your
responsibility to pay, even if the bill never arrived. It is vital to
appear appealing to human decency and sense of campus community and in
spite of this if lower ranking officials refuse to help, letters to higher
ranking campus officials do usually find success.
o You have nothing to lose by being
polite, especially when you are at the receiving end; it helps to remember
that nothing is gained through combativeness or disrespect.
o When none of the above work, the
only option you are left with is to threaten and / or pursue legal action.
Collectors and businesses have nothing to gain by reporting negative
information about you and would never do this with the intention of
maligning your financial character. Moreover, since even a minor legal
interaction can cost thousands of dollars, most businesses and creditors
would rather remove items than deal with a lawsuit.
o If none of the above approaches
apply or if you are faced with failure while trying to implement each of
the modes listed above, you are left with the option of filing disputes of
negative marks on a credit report. Even if the negative marks are
accurate, some creditors do fail to respond to disputes in a timely
fashion, which in turn removes negative marks. Rather than pay the postage
it takes to respond, some creditors tend to disregard any communications
regarding paid accounts. It is considered mail fraud to falsely dispute an
item, but as long as you claim to believe an item was never late, you can
surely feel free to dispute.
Decreasing
Credit Capacity Used
Decreasing the ratio
of debt to credit capacity consists of two major approaches which are of
increasing the total capacity and decreasing your debt.
o It helps to strive to increase
limits on credit cards. The FICO formula weighs the ratio of balances to
the total available credit, hence if credit limits are increased while
balances stay the same, this ratio drops and your score will increase. If
possible, one must also try to increase limits without triggering credit
checks, as a credit check may drop the existing score by a few points.
o Use your good relationships with
banks and other businesses to your advantage. Banks have been known to
remove late notations for good customers. When a consumer is turned down
for credit cards elsewhere, such bank will often provide a low-limit
credit card. This card will increase capacity by decreasing the capacity
used ratio, even if it is only by a small amount.
o Consider the option of secured
credit cards, these cards factor into credit scores in a manner identical
to unsecured cards. If a consumer opens a $2000 secured credit account,
the resulting credit report will make it appear that someone has trusted
that consumer enough to extend him or her credit, and thereby increase
your capacity by $2000.
o Pay down the sum of all balances
without fail so that you are using the least total capacity. For instance,
using only 30% of your capacity will trigger a reduction in score; 50% is
more severe, and can cause a drop of over 10 points while 75% is a severe
red flag. A revolving balance of 0% has a slightly lower benefit as
compared to a small percentage.
o It also helps to pay down each
individual balance. It makes sense to move balances between cards so that
no single balance is at more than 30% of its capacity at any given point
in time. The 30% line may at times be difficult to reach, in such
situations try to increase credit limits, or at least reduce card balances
to less than 75% of capacity. This however contradicts the advice many
credit companies give while trying to rope in new customers to transfer
balances, since managing line usage below these thresholds will lead to a
higher score than consolidating everything into one credit line and
roughing it out. This will require more bills to be paid each month, which
in turn requires extra work on the part of the consumer.
o If you are considering a mortgage
refinance, you may be able to move some credit card debt to your home loan
or at other times by withdrawing equity.
o You also need to keep an eye on how
student loans are reported since these loans have a notorious reputation
of being reported multiple times, making one's monthly payment obligations
look much higher than they actually are. This can both have both positive
and negative effects - while a credit report will show more obligations,
on the other hand if these loans are in good standing, you will show a
good repayment history. If a loan is reported as paid late multiple times,
you need to ensure the removal of duplicate entries of negative remarks.
Minimize
Damage in Tough Times
o Attempt to negotiate with your
creditors, discussing your situation and expressing the willingness to pay
often goes a long way in salvaging the situation. If you can commit to a
firm repayment schedule, creditors have been often found to be more than
willing to skip reporting any delinquency.
o If you have lapsed or failed to pay
on time, sometimes the lender will forgive late fees and marks under
certain conditions that they deem to be genuinely worthy of an excuse.
Typically this implies that you have not abused this privilege and that,
you have paid a reasonable sum, and requested that the late charges be
forgiven. This may also prevent them from reporting it to any agencies.
The best you can do to avoid this situation is, if you know that you will
not be able to make a payment on time, make arrangements with the creditor
in advance as soon as possible.
Limit Credit
Enquiries
o Avoid causing inquiries to be posted
to one's credit report since credit score is affected adversely by recent
inquiries made against one's credit report for the purpose of evaluating
an applicant for creditworthiness, including insurance. The credit score
is not affected by obtaining a copy of one's own credit report, neither is
it affected by promotional inquiries made by direct marketers such as
credit card companies who send out prescreened direct mail offers; and not
even by account review inquiries made periodically by your own financial
institution to manage the ongoing risk of your account. Only the action of
applying for new credit or insurance creates a hard inquiry, as it is
termed, on one's credit report which affects the score. This normally
drops a FICO score by roughly 5 points, which remains for as long as two
years.
o While applying for credit, ensure
you refuse to allow the creditor to check your credit until the latest
possible stage of your transaction. While shopping for a mortgage for
instance, it helps to generate your own FICO score and use that score in
discussions.
