Monday, January 08, 2007

Financial Planning 101: How do I improve my FICO score?

Ok, so you took our advice, you’ve got your trusty FICO score in hand, and it’s not exactly where you want it to be. How do you improve your FICO score?

1) Pay on time.
Your track record in making timely payments accounts for 35% of your FICO score. All that is required is that you pay the minimum balance due on time. That shows that you are responsible.

Write the check and put it in the mail at least five days before your due date. Or if you use online bill pay, make sure you get to it at least two days before the due date.

2) Manage your debt-to-credit-limit ratio.

Your debt is the combined balances on all your various credit cards and installment loans – the sum that you owe. Your credit limit is the combined total of the maximum amount each credit card company is willing to let you charge. Included along with that calculation is whether you carry balances on other accounts, and how much debt you have left on loans such as mortgage or car loan, compared to the original amount borrowed. This determines 30% of your score.

Obviously, the lower the ratio, the better. There is no magic cutoff on what counts as a good ratio, but every little increment matters.

One way to get this ratio down is simply to pay down what you owe, but this is often difficult for us young professionals. If you are sure you have the resolve to behave responsibly, ask the card company to boost your credit limit. Boosting your credit limit, without adding to your debt will improve your debt-to-credit-limit ration.

3) Protect your credit history.

About 15% of your score is based on how long a credit history you have. The longer your history the better. The biggest mistake many people make is when they automatically cancel a card. By doing so you wipe out some financial history, plus you also will reduce your available credit, and change your debt-to-credit-limit ratio.

4) Create the right credit mix.

The final 20% of your score is split between your new credit activity and your general mix of cards. Don’t apply for a lot of new credit cards or loans all at once. At the same time, lenders always want to see a good mix of credit cards, retail cards, and installment loans such as car loans or home mortgages.

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