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HOW TO IMPROVE YOUR CREDIT RATING

If you pay your bills on time and don't accumulate too much debt, your FICO credit score will probably not change much over time.  However, your credit score can change significantly in a few months if you currently have a poor credit score and make an effort to improve it by paying your bills on time and paying down debt.  But just how much do certain activities affect your FICO credit score?  The following estimates will give you an idea of just how quickly you can lower and raise your FICO credit score.  Note that these are just estimates and one shouldn't assume that his or her credit score would increase by the amounts indicated in the examples below.

Example 1:

Suppose you had about $60,000 in non-mortgage debt and were more than 90 days delinquent on two credit cards.  Your FICO score might be a low 595 [which is well below the 750 - 850 FICO score that one should have].   Despite the fact that you have been delinquent paying your bills and your credit score is low, you can raise it in a relatively short period.  Just sending in at least the minimum required on your delinquent credit cards for three months could raise your FICO credit score 20 points.  If you continued to make your payments as agreed for six months, you could raise your FICO credit score by as much as 50 points.  If you continued to pay at least the minimum due on those credit cards for one year, you could raise your FICO credit score by as much as 80 points, from 595 to 675.   Of course, 675 is still short of the 750 to 850 credit score one should strive to have, but given time you would get there.

Example 2: 

Suppose you had an account on your credit report indicating that you defaulted on a credit card for $15,000.  If you began to pay off that delinquent debt by sending $500 per month for just three months, you could increase your FICO credit score by as much as 70 points [assuming you don't accumulate any more debt during this period, apply for more credit, etc.].  If you asked the creditor to "reage" the account and remove any delinquent notations on your credit report, you could raise your FICO credit score by as much as 100 points in six months.

Remember that the three factors that affect your FICO credit score the most are (1) paying all bills on time; (2) not accumulating too much debt; and (3) time.  Even if you have a very low FICO credit score today, you can have a very high credit score in a year or two if you start today paying all bills on time, paying down debt and using credit wisely.


Factors That Lower Your Credit Score

While paying your bills as agreed and not accumulating too much debt will likely result in an excellent credit score, there are certain activities that will lower one's credit score.

1.  Applying for a new credit card, mortgage or car loan.  Unless you don't have much of a credit history and haven't established a credit rating yet, applying for a new credit card, a mortgage or auto loan can lower your credit score by about 10 or 15 points.  If you haven't used credit much or have a short credit history, applying for a new credit card, mortgage or auto loan could raise your credit score by ten or 15 points.

2.  Missing a monthly payment can knock as much as 35 points off your credit score.

3.  Filing for bankruptcy can knock as much as 200 points off your credit score if your credit score is high. 

4.  Max out your credit cards.  Maxing out your credit cards can knock off anywhere from 20 up to 120 points off your credit score.  A good rule of thumb is to never carry credit card balances that are more than 25% of your total credit card limit. 

Next topic:  Credit Scores and Mortgage Loans


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