How to Improve Your FICO Score
In today's financial landscape, your FICO score holds significant sway over your ability to secure home loans and favorable interest rates. But what exactly is a FICO score, and how can you improve it? Whether you're aiming to buy a home, apply for a credit card, or simply enhance your financial standing, understanding and improving your FICO score is essential. In this guide, we'll cover:
What is a FICO Score
A FICO score is a three-digit number that represents your creditworthiness based on your credit history. It's named after the company that developed it, Fair Isaac Corporation (FICO). Lenders and creditors use your FICO score to assess the risk of lending to you. The higher your score, the more likely you are to receive favorable terms on loans and credit.
How is a FICO Score Calculated?
Your FICO score is calculated using information from your credit report, which is provided by the three major credit bureaus: Equifax, Experian, and TransUnion. While the exact formula used by FICO to calculate scores is proprietary, several key factors influence your score:
Payment History (35%): This is the most significant factor impacting your FICO score. It reflects whether you've paid past credit accounts on time.
Amounts Owed (30%): This factor considers the amount of debt you owe compared to your credit limits.
Length of Credit History (15%): The length of time you've had credit accounts impacts your score. Generally, a longer credit history is favorable.
Credit Mix (10%): Having a mix of different types of credit accounts, such as credit cards, mortgages, and installment loans, can positively influence your score.
New Credit (10%): Opening several new credit accounts in a short period may negatively impact your score.
Understanding these factors is crucial as they provide insights into areas where you can focus your efforts to improve your FICO score.
Understanding FICO Score Ranges
FICO scores range from 300 to 850, with higher scores indicating better creditworthiness. Here's a breakdown of the score ranges:
Poor (300-579): Individuals with scores in this range may struggle to qualify for credit or may only be offered high-interest rates.
Fair (580-669): While individuals with scores in this range may qualify for credit, they may still face higher interest rates and less favorable terms.
Good (670-739): Scores in this range are considered good, and individuals are likely to qualify for credit at competitive rates.
Very Good (740-799): Individuals with scores in this range typically qualify for the best interest rates and terms on loans and credit cards.
Excellent (800-850): Scores in this range represent exceptional creditworthiness, and individuals are likely to receive the most favorable terms on credit products.
How to Improve a Low FICO Score in 7 Steps
If you find yourself facing the challenge of a FICO score of 500 or less, don't despair. With determination and a strategic approach, you can take proactive steps to improve your creditworthiness. Here's a comprehensive guide on how to raise your FICO score in seven manageable steps.
Step 1: Obtain Your Credit Report
Start by ordering a copy of your credit report from the major credit bureaus – Experian, Equifax, and TransUnion. After a credit denial, you're entitled to a free report. Reviewing your report will give you insight into areas that need improvement, and help you identify any errors or inaccuracies that may be dragging down your score.
Step 2: Pay Your Bills On Time
Consistently paying your bills on time is one of the most impactful ways to boost your credit score. Set up reminders or automatic payments to ensure you never miss a due date. Timely payments demonstrate financial responsibility and can positively influence your creditworthiness.
Step 3: Get Current and Stay Current
If you've fallen behind on payments, prioritize bringing your accounts current and maintaining that status. Late payments can significantly impact your credit score, so focus on staying up to date with all financial obligations.
Step 4: Pay Off Debt and Keep Balances Low
Reduce your outstanding debt by paying off balances rather than moving them around. Additionally, aim to keep your credit card balances low, ideally below 30% of your available credit limit. Lowering your credit utilization ratio can improve your credit score over time.
Step 5: Dispute Errors on Your Credit Report
Review your credit report thoroughly for inaccuracies or discrepancies. If you spot any errors, file a dispute with the credit bureaus to have them corrected or removed. Providing supporting documentation, such as canceled checks or correspondence, can strengthen your case.
Step 6: Wait for Updates and Verify Information
After disputing errors, allow approximately two weeks for the credit bureaus to update your reports. Take the time to verify that the corrected information reflects accurately. If discrepancies persist, follow up with additional letters or documentation as needed.
Step 7: Address Collections and Negotiate Settlements
When you are financially able to work on paying off your collections, follow these steps.
Prepare for battle - These people are not customer service oriented, and can be a little on the abrasive side. Keep your goal in mind and keep cool. Collection companies will usually settle for a lesser amount than what you “owe”. This magic number may have late fees, processing fees, administration fees, you took too long to pay us fees, breathing fees, etc. A good place to negotiate from is usually 50% to 60% of the total bill. It is easier to negotiate a lower payoff when you are paying the collection off in full as opposed to setting up a payment plan. If you are met with resistance, ask politely for a supervisor or manager. When you pay off the debt make sure you state on the check that this constitutes payment in full. Use paper checks for a better paper trail, -not electronic. Plus, there can be no “accidental overcharges”. Get terms in writing before paying off and be ready to overnight funds.
Write down everything - Names, dates, times and terms you have negotiated. Document everything. These are not fun and pleasurable jobs for employees and turnover is higher than in other fields. Protect yourself by writing everything down!
Act Businesslike - Stay calm cool and collected. You have to keep your goal in mind.
Here are a few items noted in the Fair Debt Collection Practices Act that you need to know before you call:
Collection agents may not:
Call before 8:00am or after 9:00 pm
Talk to anyone but you or your attorney about your debt
Threaten to garnish wages or seize property unless they actually intend to do so.
Threaten to sue unless they are actually taking action
Use obscene language
Annoy or harass you with repeated calls
Call at work if you have asked them to stop
Lie about their identities – note this when you are trying to document your call and they will not give their identity
Sample Letter for Borrower
February 28, 2024
Equifax
PO BOX 2104
Atlanta, GA 75013
Dear Customer Service,
I am trying to obtain a home loan. I recently had my credit pulled and was denied credit due to errors on my report. Please research these items as soon as possible. Please be advised; as per the Fair Credit Reporting Act Section 611, you are required to remove erroneous and/ or incorrect information from my credit profile. You are currently reporting the duplicate and/or inaccurate information as follows:
Creditor Acct# Report Date Open Date
Countrywide 21458 06/03 11/02
***THIS ACCOUNT HAS NEVER BEEN LATE
Sincerely,
John/Jane Doe
SSN# 555-55-5555
Wrapping Up
Improving your FICO score is within reach with the right knowledge and strategies. By understanding how FICO scores are calculated and implementing prudent financial habits, you can take control of your credit health and pave the way for a brighter financial future. Remember, small changes today can lead to significant improvements in your FICO score over time.
By following the steps outlined in this guide, you can embark on a path toward a healthier FICO score and greater financial stability. If you found this guide helpful, be sure to share it with friends and family who may also benefit from improving their credit scores.
Reach out if you have additional questions about improving your credit score and securing a home loan with our experienced loan officers.