Improving your Credit Score

Your credit score, or FICO score, is that all powerful three-digit number that reigns as king of your financial life. A person’s credit score not only determines if he or she can be approved for a loan, credit card, or even a cell phone contract, it also determines the interest rate that person will pay. A lower FICO score equals a higher interest rate, which translates to paying more money in the long run. The good news is that there are ways to improve your score and broaden your financial options. By understanding the factors that produce your credit score, you have the opportunity to make it better.

Is there a formula to building better credit? Yes. Everyone’s FICO score is calculated the same way, regardless of income. Many people want to do what they deem to be easier: pretending the score does not exist so that they do not have to own up to it. But financial transactions are recorded, no one is exempt and ignorance is not a part of the formula.

The heaviest factor in calculating a FICO score, with a weight of 35 percent, is paying bills on time. That’s right, the credit bureaus know if you historically neglect payment until you see a disconnect notice. The most important action you can take to improve your score is paying every bill on time, every month.

Accounting for 30 percent, the second strongest factor in determining your FICO score is the ratio of your credit card and loan balances to your total credit limit. The credit bureaus simply do not want to see that you have spent to the max. If you have an outstanding credit card balance of $3,000 with a credit limit of $3,300, it is worse than having the same outstanding balance with a $20,000 limit. Use common sense about debt and never miss a credit card payment.

The other three factors determining your all important credit score are the length of your credit history (15 percent), recent applications and new accounts (10 percent), and your combination of loans and credit cards (10 percent). Incorporating financial common sense into your everyday life, starting with the advice above, will increase your credit score over time.

When making a large purchase, such as a home or a car, investigate how the purchase will affect your credit score. For example, do not apply for loans at seven different car dealerships. Multiple credit inquiries in a short time period negatively impact your score, falling into the “recent applications and new accounts” category above. However, by getting the right information, you can make financing a car work to your advantage. Select dealerships provide in-house financing (even for applicants with bad credit), which omits the need for outsourcing your loan. Outsourcing to a bank often means multiple inquiries will be made on your credit, which can hurt your score. Make sure the dealership you choose provides true in-house financing, and reports to at least one of the three credit bureaus. Having your loan and timely payments reported to the credit bureau is crucial to rebuilding your credit.

The biggest mistake many people make is ignoring their credit score. The first step to take is getting a copy of your credit report to see where you stand. By adhering to these simple rules, you will continue to raise your credit score, be eligible for better interest rates, and improve your financial outlook for the future.

About the Author: Greg Chapman, of Greg Chapman Motors, is a leading provider of quality used cars, trucks, and SUVs. Chapman motors is one of the few bad credit car dealers in Austin and the surrounding area that reports to the credit bureau, allowing customers to improve their credit. For more information please visit Greg Chapman Motors.