Credit Score: Raising Your FICO Credit Score

Let’s face it, whether you like it or not credit is a fact of life. You can keep the amount of credit cards you have to a minimum and pay cash for everything but unless you have the cash to make all purchases outright - including buying a home - sooner or later you’re going to have to use credit.

Even if you have the cash to buy a home, did you know your credit score can affect the amount you pay for auto insurance, home insurance and all other types of insurance?  Many insurance companies determine risk by using your FICO credit score, this is called a ”credit-based insurance score”. Having a good credit score will lower your insurance costs.

Now that you’re resigned to the fact that credit is going to be a part of your life, why don’t you do what you can to get a higher credit score? Getting a higher credit score will get you better credit card rates, mortgage rates, auto loan rates and insurance rates.

Have you ever wondered how credit scores were determined? There are bascially five factors that affect FICO credit scores and managing these factors appropriately can raise your credit score.

1. Make your payments on time. Your credit payment history counts for 35 percent of your FICO credit score. Negative payment histories will hurt your credit score.  Having a good track record on your payment history will help your credit score.
2. The amount of money you owe compared to your overall credit available also has an impact on credit scoring. The more you owe, the lower your credit score will be. This accounts for 30 percent of your credit score.
3. The length of your credit history accounts for 15 percent of your credit score. The longer your credit history, the more this contributes to your score. Several years ago I closed a department store credit card I hadn’t used in a long time and my credit score dropped about 20 points. That being said, keep your long term account open even if you’re not using the accounts and as long as you’re not paying annual fees.
4. Applying for new credit can affect your credit score. This accounts for 10 percent of credit scores. If you apply for or open many new accounts in a short period of time, this will also affect your score.
5. Other factors contribute about 10 percent of your FICO credit score.  The mix of loans you have will affect your score like credit cards, mortgages and auto loans.

Taking a proactive approach to manage your credit will improve your credit score. You are also entitled to a free credit report annually, although if you want to get your credit score that will cost you.