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sabrinamariIf you haven't read Part 1 of my FICO post, scroll down and read it first. Otherwise, this won't make much sense.
But if you've already read it, this post will explain how FICO calculates its scores so that you can manipulate the system to your own advantage. It will also show you how to get your credit reports (but not your credits scores) for free, and tell you how to look for and fight errors and bad items that drag down your score. I take this information from a pre-existing but now defunct podcast series, "Creating Wealth on Your Current Income".
Now, the exact formula for calculating your FICO score is a closely held secret. But we do know the broad outlines of how it is done.
There are 5 categories of information that affect your FICO:
1. 10% of your score has to do with applications for new credit. Whenever you open a credit account, your FICO comes down a little bit---not much. The longer it's been since you opened a new credit card, mortgage or loan account, the higher this part of your score rises.
2. 10% is based on the types of credit you have---installment credit (like mortgages), revolving debt (like major credit cards), store charge cards, etc. All these affect your score. One type of credit always brings your score down: the kind where the ads say,"No interest for a year!" or "No interest till _____!". Credit card companies know that 90% of people will not pay off this kind of debt before the interest kicks in---then they will have to pay exorbitant interest starting from the FIRST DAY they charged the item. Avoid these promotions like the plague.
3. 15% is based on the length of your credit history---how long you have held and managed a credit account is essential to your score. Older accounts raise your score higher. So when you pay off a credit card, think carefully before you close it---especially if it's one of your older accounts. In general, most financial gurus tell you not to close paid off credit card accounts for this reason and one more (see below). Dave Ramsey disagrees. He believes in a no-credit-card life. Someday, I want to buy a house, so I need a high FICO. Thus, I keep my credit card accounts open but mostly empty.
THE LAST TWO CATEGORIES ARE WHOPPERS!
4. 30% of your score is based on how much you owe. This is broken down into 2 subcategories:
a. Your total outstanding debt
b. How many accounts make up your balance
If you are using a high percentage of your total available credit, your FICO score is very badly affected. If you are using a low percentage of your total outstanding credit, your FICO score is sent soaring.
Examples:
You have $10,000 in total available credit. You have $9,000 on your credit cards. You are using 90% of your available credit. You are considered a very risky borrower.
IF...you are currently using 75% or more of your available credit...you are RISKY, and this part of your score is very low.
50% or so...you are considered about average, and this part of your score is about average.
Less than 50%...you are considered above average, with a better than average score.
Less than 30%...optimal! This is the best category with the highest numbers for this part of your score.
This is the second reason not to close paid off credit card accounts: closing them lowers your total available credit and converts your existing debt into a larger percentage than before!
The more different accounts you are using for your charges, the lower this part of your FICO score. $10,000 split on 6 different cards is worse than $10,000 split on only 2 cards.
5. 35% of your FICO score is based on your payment history, or how consistently you make your payments on time.
This is great news: the two biggest categories of FICO are the two you can most easily control.
To make progress fast:
1. Always pay at least the minimum early or on time.
2. Pay down your debt consistently and don't charge anything more!
Traps to watch out for:
1. Be careful if you have an old unpaid debt hanging around---like several years old or more. Your FICO score only looks back 2 years, so that old debt will have fallen out of its formula. If you pay it off, it will suddenly jump forward and be part of the calculation, lowering your score once more.
2. FICO (and your credit reports) track how many times you have been more than 30 days late, more than 60 days late and more than 90 days late with a payment. Being over 90 days late has the same impact as either a bankruptcy or a foreclosure. NEVER be over 90 days late with a payment.
3. 86% of all credit reports contain errors; 30% contain errors that seriously affect/lower credit scores. So get your credit reports and check them carefully, contesting any errors you may find. When you contest a bad item, a credit reporting company has 30 days to authenticate it. If they can't authenticate it (if it's a mistake, if the original company lost their records or if they discarded their records and can't trace the claim) the item MUST BE REMOVED.
This means that accurate bad items can sometimes be fought and removed. You may want to think about the ethics of this. I did, for about 30 seconds, then realized I had no pity for credit card companies, credit reporting companies, or any of the large companies affiliated with the credit industry...but that's just me. Do what you think is right.
To raise your score:
1. Never pay anyone to 'repair your credit'! You can do it all for free online yourself, or buy a small kit to make it all easier for $16-$50.
[Link to helpful (but unnecessary) kits: http://www.myfico.com/Products/Products.aspx]
You can get one free credit report from each of the three credit reporting companies once each year. You can't get your scores for free---you must pay between $7 -$10 each for those (or you can pay just a little bit more for a MyFICO.com kit that walks you through everything). Go here for the free reports:
http://www.annualcreditreport.com
Many companies charge hundreds or thousands of dollars for false "credit repair". *Never* fall for this. Either do it yourself online or pay under/about $50 for a kit that will get you your reports and scores and help you fight errors and bad items more easily.
Once you have your credit reports: go through and highlight errors and bad items. Follow the online links to each company you are given, and go to the screen that lets you contest bad items. You will be given a format that lets you list each items you want to fight/contest. Use the highlighted reports to guide you in filling these out. You will then be told that the company will contact you within 30 days with the results of their investigation.
Watch your email. You will be sent links to the results. Often, you will win and the item(s) will be dropped!
That's it---you're now a FICO expert.
But if you've already read it, this post will explain how FICO calculates its scores so that you can manipulate the system to your own advantage. It will also show you how to get your credit reports (but not your credits scores) for free, and tell you how to look for and fight errors and bad items that drag down your score. I take this information from a pre-existing but now defunct podcast series, "Creating Wealth on Your Current Income".
Now, the exact formula for calculating your FICO score is a closely held secret. But we do know the broad outlines of how it is done.
There are 5 categories of information that affect your FICO:
1. 10% of your score has to do with applications for new credit. Whenever you open a credit account, your FICO comes down a little bit---not much. The longer it's been since you opened a new credit card, mortgage or loan account, the higher this part of your score rises.
2. 10% is based on the types of credit you have---installment credit (like mortgages), revolving debt (like major credit cards), store charge cards, etc. All these affect your score. One type of credit always brings your score down: the kind where the ads say,"No interest for a year!" or "No interest till _____!". Credit card companies know that 90% of people will not pay off this kind of debt before the interest kicks in---then they will have to pay exorbitant interest starting from the FIRST DAY they charged the item. Avoid these promotions like the plague.
3. 15% is based on the length of your credit history---how long you have held and managed a credit account is essential to your score. Older accounts raise your score higher. So when you pay off a credit card, think carefully before you close it---especially if it's one of your older accounts. In general, most financial gurus tell you not to close paid off credit card accounts for this reason and one more (see below). Dave Ramsey disagrees. He believes in a no-credit-card life. Someday, I want to buy a house, so I need a high FICO. Thus, I keep my credit card accounts open but mostly empty.
THE LAST TWO CATEGORIES ARE WHOPPERS!
4. 30% of your score is based on how much you owe. This is broken down into 2 subcategories:
a. Your total outstanding debt
b. How many accounts make up your balance
If you are using a high percentage of your total available credit, your FICO score is very badly affected. If you are using a low percentage of your total outstanding credit, your FICO score is sent soaring.
Examples:
You have $10,000 in total available credit. You have $9,000 on your credit cards. You are using 90% of your available credit. You are considered a very risky borrower.
IF...you are currently using 75% or more of your available credit...you are RISKY, and this part of your score is very low.
50% or so...you are considered about average, and this part of your score is about average.
Less than 50%...you are considered above average, with a better than average score.
Less than 30%...optimal! This is the best category with the highest numbers for this part of your score.
This is the second reason not to close paid off credit card accounts: closing them lowers your total available credit and converts your existing debt into a larger percentage than before!
The more different accounts you are using for your charges, the lower this part of your FICO score. $10,000 split on 6 different cards is worse than $10,000 split on only 2 cards.
5. 35% of your FICO score is based on your payment history, or how consistently you make your payments on time.
This is great news: the two biggest categories of FICO are the two you can most easily control.
To make progress fast:
1. Always pay at least the minimum early or on time.
2. Pay down your debt consistently and don't charge anything more!
Traps to watch out for:
1. Be careful if you have an old unpaid debt hanging around---like several years old or more. Your FICO score only looks back 2 years, so that old debt will have fallen out of its formula. If you pay it off, it will suddenly jump forward and be part of the calculation, lowering your score once more.
2. FICO (and your credit reports) track how many times you have been more than 30 days late, more than 60 days late and more than 90 days late with a payment. Being over 90 days late has the same impact as either a bankruptcy or a foreclosure. NEVER be over 90 days late with a payment.
3. 86% of all credit reports contain errors; 30% contain errors that seriously affect/lower credit scores. So get your credit reports and check them carefully, contesting any errors you may find. When you contest a bad item, a credit reporting company has 30 days to authenticate it. If they can't authenticate it (if it's a mistake, if the original company lost their records or if they discarded their records and can't trace the claim) the item MUST BE REMOVED.
This means that accurate bad items can sometimes be fought and removed. You may want to think about the ethics of this. I did, for about 30 seconds, then realized I had no pity for credit card companies, credit reporting companies, or any of the large companies affiliated with the credit industry...but that's just me. Do what you think is right.
To raise your score:
1. Never pay anyone to 'repair your credit'! You can do it all for free online yourself, or buy a small kit to make it all easier for $16-$50.
[Link to helpful (but unnecessary) kits: http://www.myfico.com/Products/Products.aspx]
You can get one free credit report from each of the three credit reporting companies once each year. You can't get your scores for free---you must pay between $7 -$10 each for those (or you can pay just a little bit more for a MyFICO.com kit that walks you through everything). Go here for the free reports:
http://www.annualcreditreport.com
Many companies charge hundreds or thousands of dollars for false "credit repair". *Never* fall for this. Either do it yourself online or pay under/about $50 for a kit that will get you your reports and scores and help you fight errors and bad items more easily.
Once you have your credit reports: go through and highlight errors and bad items. Follow the online links to each company you are given, and go to the screen that lets you contest bad items. You will be given a format that lets you list each items you want to fight/contest. Use the highlighted reports to guide you in filling these out. You will then be told that the company will contact you within 30 days with the results of their investigation.
Watch your email. You will be sent links to the results. Often, you will win and the item(s) will be dropped!
That's it---you're now a FICO expert.
