FICO: Learn How to Score High

Back in your school days, if you score high in every exam as well as in extra curricular activities, you may be hailed as the “class valedictorian.”  If you fail the exams, you may be labeled an “idiot” and may have to repeat a grade.  In the game of Scrabble, whoever gets the highest score wins the game, and whoever gets the least is out of fame.  In a sitting for a professional exam, score the highest and you will be granted your professional license.  Score the lowest, and you will be re-taking the test till you pass it.

What is the point I am trying to make?  Wherever you go, score plays a vital role.  The same thing applies to credit scores.  The higher you get, the better off you are.  You won’t have any trouble getting the loans that you need to finance your plans; the creditors will be flocking to you to offer you a loan or, at the very least, let your loan application papers go through without question.

What is FICO?

FICO stands for Fair Isaac Corporation, known as the best and most widely used credit score model in the US.  FICO scores are derived from customer’s credit information.  Banks and other lending companies base their lending decisions on this score.  It helps them determine the interest rate to charge the loan or credit line applicants, the amount of loan to award, the collateral or security to require (or if there’s to be such a collateral), the income and asset verification procedures to follow, etc.  If you want great credit options, then you want a decent FICO score.

Ways to Protect your FICO

Know the math!

Thirty-five percent of your score is based on your payment history.  It is therefore given that on-time payment of bills will translate into a better credit score. Late payments will definitely create an adverse affect on your score, and non-payment of dues will create an even more adverse effect.

You have to pay petty fines like library fees, traffic fines or parking tickets.  This may sound irrelevant but the truth is that non-payment of these things will negatively affect your FICO rating in as much as non-payment of credit card dues and missed payments will.  Great importance is given to these small debts because of shortfalls in budget which resulted from overspending when higher tax revenues were earned.  Some municipalities even pass their credit collection hats to collection agencies.  When these agencies report that they are after you, you can expect to see a slide on your FICO Score.

Avoid credit card charge-offs and loan defaults.  Make it a point that you pay at least the set minimum payment each month.  Remember that a delinquency will stay on record for seven years.  If you’re considering filing bankruptcy just so to avoid delinquency issues, think twice.  Such a move will completely devastate your score.

Thirty percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25 percent or less of their limits.

Moving along with the math, 15% is based on the length of your credit history.  Closing of old credit card accounts is not advisable for it will only make you a potential credit risk in the eyes of lenders; closing credit card accounts with outstanding balances is also damaging.  On another note, you should not open more credit card accounts than you actually need.

A further 10% of your score is based on credit inquiry accounts.  Quit applying for several loans at the same time or within a short period of time.  It will make you look more of a credit risk.

The final 10% of the score is based on the types of credit you currently have. It will help your score to show that you have had experience with several different kinds of credit accounts, such as revolving credit accounts and installment loans.

FICO is a numbers game.  A FICO score is just a score, BUT this score can make or break a person!