Here’s the great news folks: The higher your credit score, the less money you will have to pay in future interest. For example, getting a mortgage with a 650 (below average) score with get you an interest rate of around 7%. Now if you raised your score by just 100 points, you most likely would be able to get a mortgage close to 6%. That would save you almost $200 per month in payments. In 30 years (the usual length of a mortgage loan) you would have saved a staggering $390,000 in interest over that course of time. Now let’s see what goes into raising your credit score by 100 points or more in just a few months.
Credit Score Factors?
Because the FICO credit is the most widely used for calculating a personal credit score, in this article we’re going to focus on how to improve your FICO score. But before we get ahead of ourselves, let’s first take a look at how it’s calculated. FICO calculates your credit score, and they breakdown is determined by the following benchmarks:
35% Payment history
30% Outstanding debt
15% Length of credit history
10% Types of credit in use (revolving or fixed)
10% Recent inquiries on your credit report
1. PAYMENT HISTORY. This criteria takes your track record into account and accounts for 35% of your score. The first thing any lender wants to know before giving credit approval is how timely you’ve been in paying loans in the past. Late payments will automatically drop your score, while a good track record on most of your credit accounts will raise your score.
Also, public record and collection items such as bankruptcies and foreclosures will show up in this section, but if they are more than 7-10 years old they should be removed from you credit. If they’re not taken off, it shouldn’t cause do too much damage if you’re current payment obligations have been paid on time.
2. Debt Ratio. Approximately 30% of your FICO score is based on your debt to equity ratio. When you almost close to hit the credit limit on all, or most, of your accounts, your credit score will take a hit, and be lower. So to a lender, this basically means that you’re over-extended, and may be at risk if more credit is extended to you.