Improve My Credit Score: What Makes Up My Score Anyway?

The credit score, also referred to as a “FICO score,” is a mathematical formulae created by Fair, Issac and Company.

The credit score is used by most companies to decide if the applicant is a good credit risk or not. Equifax and Trans Union will calculate the numbers from the credit report and generate a number between 300 and 900.

A low score indicates a bad risk. A score of 700 or more puts the applicant in the lenders’ good books.

How scores are calculated:

Factor Weight Points Payment History Bankruptcies, late payments, past due accounts and wage attachments, collections, judgements - none is better 35% 315 Amounts Owed Amount owed on accounts, proportion of balance to total credit limit - moderate use is best 30% 270 Length of Credit History Time since accounts opened, time since account activity - active and long time user is best 15% 135 New Credit Number of recent credit inquiries, number of recently opened accounts - less is best 10% 90 Types of Credit Number of various types of accounts (credit cards, retail cards, mortgage) - variety is good 10% 90 Potential Totals 100% 900

 

How Clients Can Improve Their Credit Score

1. Order a copy of the credit report, review it carefully and correct any significant errors. 
2. Pay bills on time. 
3. If there is a questionable credit history, they could open a few new accounts and use them responsibly, paying them off on time. 
4. Avoid opening accounts without intention of using them. Having five or six of the same credit card type (e.g., Visa), is not favourable. 
5. Having a credit card or instalment loan can help boost a credit score, as long as the balance is not too high. 
6. Keep balance low in relation to available credit. If the credit limit is $10,000, keeping the balance below $2,500 (or 25 per cent of the limit) will improve the score. Balances of more than $7,500 (or 75 per cent of the limit) will decrease the score. Going over the limit has an even more negative effect. 
7. Pay off credit card debt instead of moving it around to lower rate cards. Moving balances to other credit cards (i.e., “balance transfer”) and closing an old account can hurt the score.

BONUS: If you'd like to learn more about your credit score, check out the following free guide: Understanding Your Credit Report and Credit Score

 

 

If you have a question about your particular situation, post a comment here and I'll answer back.  No doubt others will benefit from seeing real life examples and suggestions.