There are many different credit scores that lending agency’s use. They mold our daily life and decide our financial and mental futures (they can drive you insane easily). We will focus on the most widely used and adopted score, the FICO score.
FICO stand for the Fair Isaac Corporation which is listed on the NYSE. The Fair Isaac corporation provides analytic and decision making services that include credit scoring intended to help financial services companies make complex, high-volume decisions such as determining whether a person is eligible for this line of credit.
However everyone knows that this is blown out of proportion with insurance agency’s using your score to determine your insurance rate. Your cellphone provider pulls your report and decides if you should be approved or not.
The list can go on and on but we do see a pattern… When people want to find out how “trustworthy” you are they pull your credit score.
The above is going way too far with just a simple “credit score” which was only intended to grade the ability of people to take on a line of credit. However this is how society has been grafted (by our corporate overlords) and we just have to deal with it.
I am going to outline some basic things that you can do to boost your credit (FICO) score. It will help you achieve a higher score and lower just about every payment you currently or are ever going to make as long as most people use your credit score as a means of judgment.
The next part of the article assumes that you have been making your payments on time and have at least 1 or more lines of credit open.
As in every calculated score, certain values are placed on core indicators. Each person is then matched up to these indicators and the score is calculated. We are going to focus on one factor that is many times overlooked.
First you have to understand the limitations of the FICO score. The agencies cannot look into your bank account to see how much money you have. Having access to your banking information is gold from the credit agencies perspective because it is the best indicator for how well you are doing financially.
Since they don’t have access to your bank account they take the next best thing. Your credit history. This is how the FICO (credit score) is calculated.
- 35% — Payment history
- 30% — Credit utilization – Your credit to debt ratio
- 15% — Length of credit history
- 10% — Types of credit used (installment, revolving, consumer finance, mortgage)
- 10% — Recent search for credit – Credit inquiries.
We are going to focus on the Credit utilization (credit to debt ratio) assuming that you have a good payment history (no late payments on record). Additionally it accounts for 30% of your score.
We all use our credit cards for everyday purchases and at the end of each month we have a choice payment, the minimum (or more) payment or the entire balance. The fact is that the credit agency doesn’t even know which one we chose. All they see is the ending monthly balance. They use this monthly balance to measure your credit to debt ratio and see how much spending power you have.
The trick is to make your payment before your credit card bills you which in turn lowers the amount that they report as the remaining balance to the credit industry and you achieve a lower credit to debit ratio.
You can also take advantage of this if you pay more then the minimum payment. All you need to do it is pay what you intended to pay (minus the minimum payment) and then just pay the minimum payment when you get the bill.
Combining this with regular credit limit increases you should be on your way to lower payments in no time.