FICO Score - How To Improve Debt Credit Score Fast

In the United States, one of the most common discussions amongst its people would be related to credit scoring. Reason behind this is because the score achieved by any consumer would greatly affect the amount of mortgage, loans and many other financial related services.

To put it simply, a credit score is similar to a report card (I know, we have all been through that) where you would get a good nagging for something low and reward for a high score.

Contrary to what many people believe, there is no one universal way of categorizing credit score where the last time you took an extra 5 pennies from the cashier would be recorded on your credit score.

There is however, a widely used well known credit score in the United States, commonly known as FICO or Fair Isaac Corporation. FICO score basically indicates the likelihood of a person to default a loan and this is a commonly adopted tool by most consumers banking and credit industry.

Before going into the discussion on how FICO rating may be improved, it is worth to have a rough idea on what FICE rating is based on.

Basically, FICO rating is separated into a few statistical components where these components are made up from: -
- 35% - punctuality of payment in the past
- 30% - the amount of debt, expressed as the ratio of current revolving debt (credit card balances and others) to total available revolving credit (credit limits)
- 15% - length of credit history
- 10% - types of credit used (installment, revolving or consumer finance)
- 10% - recent search for credit and/or amount of credit obtained recently.

The first step to improving a FICO rating is to get a copy of your own credit report. This can be attained from Equifax and Fair Isaac, TransUnion or Experian.

After that, brace yourself for the agony (or joy if you’re an accountant) of going through all the numbers and making sure everything adds up to the best of your knowledge.

Reason is because if something is wrong in the report, it’s best to get them corrected because it can take up to months to get a proper correction.

Secondly, if you have serious credit car debt where most of your card balances are close to the credit limit, it’s best if you pay them off as soon as possible.

The banks and lenders prefer a large gap between a credit card balance and the credit limit, approximately to a ratio of 40% between balance/limit. Paying off any excess credit card debt would definitely increase the FICO score as it takes up 30% of the FICO score.

Next, it is equally important for you to pay off your debt on time. Despite being able to pay off your debt, it would not go down well in your FICO score if you do not pay your debt on time and every time.

The punctuality of your payment takes up 35% of your score and it is important to know that paying your debt on time now is outweighs the fact that you paid your debt on time 3 years ago.

It is always important to maintain your longest standing account. Reasoning behind this is because the longer you have your financial history established; the easier it is for the creditors or banks to know how reliable your FICO score are.

For example, even if you score a relatively high score, if you credit history is just 5 years as compared to an average rating with a credit history of 30 years, the person with the longer credit history would possibly acquire a larger amount of loan or a lower repayable interest rate.

All in all, it’s a not nuclear physics when it comes to raising your FICO score. All it takes is for you to lower your credit card debt, pay your bills on time and keep track of where you are heading in your spending, mortgage and loans. This is not too tough now, is it?

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How Credit Scores Affect Mortgage Applications

With a good credit score an applicant will receive prompt response from many lenders, all of them offering low interest rates and low down payment options. The loan amount offered also may be high. On the contrary a low credit score would result in a lot of rejection from various mortgage financers. Because creditors wouldn’t come forward easily to give credit to individuals that have a history of difficulty in repaying existing loans. After all, creditors take risk when they finance mortgages against the credit history of a debtor. Naturally, they will wish to remain on the safe side and pick up less risky ones that have good credit histories. A good credit score means less chance of missing on payments and therefore less risky.

But there are some real risk takers that will come forward to finance mortgages for individuals with bad credit scores. They would charge high down payments and always high interest rates though. They may also fix additional charges for every little paper work and may charge high closing rates. The loan amount offered will also be considerably less. The individual with poor credit scores will not have much choice but to accept the terms and conditions as there are no other alternatives. This is a tight situation and to avoid this you must have a good credit score.

People with bad credit may fall in to the trap of ’secured loans’. Secured loans are the ones where the loan applicant offers an asset as collateral security. The lender becomes secure about the repayment of the loan and not the borrower. Securing a loan with bad credit score becomes easy only when the applicant is willing to offer some asset as collateral security. This again is a very dangerous situation where an individual runs the risk of losing his entire collateral asset in case of failing to pay the loan installments in time. An individual should always avoid such type of a loan.

Resort properties normally require large amounts of finance which a person with bad credit may find it difficult to obtain. So it is always advisable to keep your credit score high. Incase the credit score becomes low due to unavoidable financial reasons it can be improved upon. There is no need to lose hope simply because a person has a low credit score. If the property that he intends to buy has good equity he should go out and try to obtain finances for it. There are many sub prime lenders willing to offer their services.

For a review of your credit report as it relates to a mortgage loan and a consultation on the best loans available to you, give us a confidential, no obligation and no cost call.