Hack Your FICO Score: Build Your Credit!
FICO scores act as a gauge that measures a borrower’s level of risk. We seem to have to play the FICO score game at that point in our lives when it’s time to be on our own. We find out the hard way, and we wish we had either established or protected our creditworthiness because now we need it. FICO scores are used for mortgages, car loans (don’t do it), apartments, and even for employment. I’m not saying that you need one, but it certainly helps if you have a good FICO score. But in order to have a great FICO score, you must understand how it is calculated.
How is your FICO score calculated? Well your FICO score is constructed from positive and negative data collected from five categories. Payment History (35%), Credit Utilization (30%), Credit History (15%), Credit Mix (10%), and New Credit (10%).
Credit Score Ranges (301 to 850)
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Payment History is the most important category and accounts for a whopping 35% of the formula used to determine your credit score. Only payments on accounts that are reported to the credit bureaus count towards payment history. Payments on credit cards (Visa, MasterCard, American Express, Chase, etc.), retail store cards, installment loans, finance company accounts, and mortgage loans all are recorded in your payment history. Rent payments, utility bills, and subscription services don’t count (unless you don’t pay, and it goes to collections.) Negative impacts on payment history are bankruptcies (7 years), foreclosures, lawsuits, delinquencies, liens, and court judgments. Work quickly to remove negative items as your score will not rapidly improve while negative items exist.
*Tip: Make all payments on time, no exception.
Amount Owed (Balances): Balances owed on accounts is responsible for 30% of your FICO score. When it comes to improving your credit score, keeping your credit utilization less than 30% will put your score on the rise. Creditors look for good management of your available credit. Be sure not to overextend yourself with rationalizing whether or not you can handle the payment. Finance charges and minimum payment increases can come as unexpected surprises. Balances are also not totaled, so make sure properly manage each account in good-standing.
*Tip: Never use credit cards as an extension of your income, only spend what you can repay within 60 days.
Length of Credit History: The length of time that you have managed credit, is 15% of the formula used to calculate your credit score. This category analyzes the average age of your accounts. It measures the oldest, average, and newest accounts as a base for your credit history. It is best to establish credit early and not take on several cards as it will dilute your length of history since it averages the total number of accounts. For example, if you had maintained a card for 10 years and opened two new accounts, your average account length just went from 10 years to 3 years!
*Tip: Open a secured credit card with your bank at age 18, or at the start of your credit journey. This establishes your FICO score with on-time payments, credit history, etc.
Credit Mix: There are several different types of accounts that are reported to the credit bureaus. Installments, revolving, and mortgages are a few. I wouldn’t suggest focusing on credit mix to boost your FICO score as it only represents 10% of the formula. As you build your creditworthiness, you will qualify for other types of accounts such as mortgages.
New Credit: New credit is tempting, especially in the beginning. Don’t get impulsive and apply for a bunch of different credit cards or loans, it will take 2 years to erase each hard inquiry. The goal of establishing credit is to prove to lenders that you are responsible enough for consideration for larger financial products like mortgages. New credit also represents 10% as a category in your credit score. Checking your own credit does not count towards inquiries as well as multiple mortgage inquiries within a specified period.
Tip: Closing accounts will not remove them from your credit report. The creditors will stop reporting the account after 7 years (doesn’t mean you are off the hook for the debt.).
I started my credit journey completely wrong and wish I had a post like this one to guide me through the process. I remember 10 years ago my credit score was a 520… yup a 520! today it hovers around 800. I had to dig out of a huge hole and it took a ton of patience. If you don’t know, FICO scores adjust very slowly.
So what can you do if you have no credit?
- Get a secured credit card at your bank (About a $300-$500 deposit of your cash and your cash is the available credit limit)
- Set up a subscription service like Netflix or something that will charge your card each month. Also, use it for emergencies (pay back the cost of that emergency in 30 days).
- Automate your online bill payment to nearly pay the balance each month.
- Wait until your score grows and apply for a credit card that matches your creditworthiness (Best Credit Cards). (repeat step 2-3).
What if you have bad credit?
Start climbing… the only way out of the hole is up. You can’t borrow your way out. Indirect tactics like debt consolidation are a joke, the only way out is to do something about it. The longer you ignore the problem, the worst your situation will become. The only way to eat an elephant, is one bite at a time. At the end of the day educating yourself and outlining a plan are two necessary steps to build a better credit score. Download the Credit Karma app for your phone or visit the site, its free and gives you weekly updates on your credit score with graphs and suggestions. Yes, it is free! Then print your credit report and start attacking the smallest to the largest. Don’t forget to dispute anything you think is not accurate.