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August, 2009 Tax Tip

Improving Your Credit Score


Instead of a Tax Tip this month, in view of the economic situation I’ve decided to render some advice on how to better your chances of qualifying for a major loan with favorable terms.


The first thing to understand is what the FICO score is.  FICO is a publically traded company that created the best known and most widely used credit score model in the United States.  The FICO score is calculated statistically with information from consumers’ credit files.  The FICO score is primarily used in credit decisions made by banks and other providers of secured and unsecured credit.  FICO scores range from 300 to 850, with a core of 740 or higher being excellent, while a score under 620 being potential trouble..


The three major credit reporting agencies, Equifax, Experian, and TransUnion*, collect data about consumers used to compile credit reports.  They all use FICO software to generate FICO scores. Therefore, it is no surprise that every day many would-be borrowers are denied loans, while consumers with strong credit histories are getting great rates on mortgages, car loans, student loans, etc.  This is a result of your FICO scores.  The five parts of your credit score are payment history (35%), amount owed (30%), length of credit history (15%, new credit (10%), and other factors (10%).


The best advice on how to improve your credit score is to manage credit responsibly over time.  This is not a quick cure, so follow these tips and I guarantee your score will go up:


1.  Pay your bills on time.  Note that this is weighted 35% in the decision process   Slow payment has a major negative impact.  When making credit card payments, if you can’t pay in full set up automatic payments and always pay more than the minimum payment due.  This will prevent the bugaboo of incurring large amounts of interest and will make you a more desirable borrower. Be aware that paying off a collection account will not remove it from your credit report for seven years.


2.  Reduce your debt.  This is the other very major factor, weighted at 30%.   As a rule, creditors look for an optimal total debt of around 36% of your household income.  Therefore, if your monthly mortgage, car loan, and revolving credit card payments exceed 36% of your income, you will probably need to find a way to lower your debt before applying for a new loan.   If you are having trouble lowering your debt, you may wish to contact your creditors and/or see a legitimate credit counselor.


3.  Watch your timing.  Wait at least 12 months following a cured credit problem before applying for a mortgage or a car loan.  You are penalized less for problems that are over a year old.  Also, if you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.  New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information.  In addition, rapid account buildup can appear risky if you are a new credit user.


4.  Get your finances in order.  Be disciplined and act wisely.  Avoid credit card purchases prior to applying for a major loan and don’t be desperate.  Avoid independent finance companies with high interest rates, which reflect poor credit management.  Don’t open credit cards that you don’t need.  This will likely lower your credit score.


5.  Limit your credit applications.  Too many applications can lower your score.  Multiple inquiries indicate that you are having problems securing a loan and you may be a credit risk.  However, multiple applications to the same type of lender, such as a mortgage company, are counted as a single application if submitted over a short period of time.



* NOTE:  The three major credit-reporting agencies are each required to provide consumers, upon request, a free copy of their credit report once every 12 months.  Go to which is the only authorized source for consumers to access a free annual credit report online, or call (877) 322-8228. 





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