A credit score is a measure of your credit worthiness and is based on your credit history. Fair Isaac and Company (FICO) developed the software that analyzes credit history, hence the name “FICO score”.
Every time you or a creditor inquire about your credit-worthiness, credit bureaus such as Experian, MyFico, AnnualCreditReport.com, IdentityForce and IdentityGuard will calculate this information using the FICO score. These agencies are responsible for providing credit reports and scores and hence have access to your credit history: all your loans, credit card debt and payment history.
Your credit score is calculated by taking into account the following factors: amounts owed, payment history, length of credit history, credit mix and new credit. Of these criteria, payment history and amounts owed hold the most weight.
If you have bad payment history, your credit report will reflect this for 7 years.
Here are 7 ways to manage your credit score.
The first thing you should do to manage your credit score is to ensure you have a good payment history. You can do this by:
Amounts owed make up 30% of your FICO score. If you can cultivate financial discipline, you can clear up amounts owed. The tips below will also help you:
Opening multiple credit card accounts is never a good thing, especially for new debtors. This is because every new account lowers the average age of your account.
Use these tips to manage new credit:
Reducing the amount of debt you owe will not be an easy task. However, your motivation to do so should be in the financial freedom you will achieve once debt free. Not to mention, it will impact your FICO score positively in the long term. How do you accomplish this?
Closing open credit card accounts increases debt to credit ratio, because it lowers the amount of credit available to you. Even after you pay off debt, do not close the accounts.
After you get to zero balance, spend a small amount and pay it off at each month’s due date. This will prevent your cards from going dormant (which also attracts fees). Lenders automatically close dormant cards.
The smaller your debt proportion is to your credit, the better it is for you. For example, if you owe $10,000 but your available credit is $100,000, this will not affect your FICO score as much because you have only borrowed 10% of your available credit. On the other hand, if your available credit is $20,000, your score will be affected as you will have borrowed up to 50% of your available credit.
Senior policy counsel for Consumers Union, Pamela Banks, advises that paying your balances and keeping them down will boost your score. Keep your debt at below 20% of your available credit.
You can access free credit reports annually from any of the credit score providers mentioned above. Checking your credit reports regularly will help you catch any irregularities in your account. Opening an account with a credit score provider will give you unlimited score access.
If you have a good credit score, the tips above should help you to keep it that way or make it better. On the other hand, if you have a bad credit score, it will take you some time to repair it. The only way to do so is to manage debt responsibly over a long period of time.