Never in history has a three digit number been more important than it is right now. Many people get an idea that if they can qualify for the loan or credit card that they want then their score is good enough. Unfortunately, that kind of thinking is a very costly approach.
Your goal when it comes to your FICO score should not be, it is “good enough.” A recent study suggests that the American Consumer could save in excess of $28 Billion a year in credit card interest rate charges if they could just raise their score 30 points! A 30 point increase in your FICO score for most people should be a very simple process, the problem is that we as consumers are very uneducated and/or confused about the things we can do to improve our score.
People that are so-called experts have all kinds of crazy advice for when it comes to what to do to improve your FICO score. Unfortunately most of these people, or companies really have no clue what they are talking about. Their advice gets published and several people follow it with great hopes for a better score only to find out the hard way that the advice they received is usually way off track.
One of the fastest ways we as consumers can reverse the current economic situation we are in is to become educated about what to do and how to improve our FICO scores. If we increase our scores, more people are able to qualify for the things they want.
Look at the housing situation for example, prices will never increase unless there are more people that can buy a house; it is purely a function of supply and demand. The problem is that roughly 25.5% of American consumers currently have less than a 600 Credit Score. Millions of these people would love to buy a house, which would increase the buyer pool and create greater demand, but without proper education these people will never pull out of the bottom tier and become credit worthy for house buying purposes.
It doesn’t matter if you can’t qualify for things or if you can, our goal needs to be to become educated so that we can improve our scores and stop paying more for everything we do. There are 3 easy steps that most all of us can take to quickly and dramatically improve our scores.
Step #1; understand what Aggregate Revolving Utilization is. It sounds complicated but it really isn’t. In simple terms it is the percentage of revolving credit (mainly credit cards) that we are currently using.
For example, if I have one credit card and the limit is $100 and I have a balance on that card of $50, I am utilizing 50% of my available limit. If I have more than one credit card then I add all the limits together, then all the balances together, and divide. So if I have three credit cards, each has a limit of $1,000, I would add those together ($1,000+$1,000+$1,000) and I would get a total of $3,000 in available limits. Lets assume all three of these cards have a balance of $500 each, I would add these balances together ($500+$500+$500) for a cumulative total of $1,500. So for this example we have $1500 in total balances and $3,000 in limits which again would result in 50% utilization.
That is step 1; understand what Aggregate Revolving Utilization is, by the way this makes up most of the second largest piece of your FICO score. If you do not have any revolving accounts, you need to get at least one. I don’t want you to get in debt, but I do want you to play the game. Without any revolving credit you are losing several points on your FICO score, which in the end means you are paying more than you need to for several things.
Step #2; compute your own Aggregate Revolving Utilization. One thing I recommend you doing for this step is to go to www.annualcreditreport.com and pull your own credit report. This is a free service and you are entitled to it once every 12 months with out charge. You will not get scores on this site for free, but we are not concerned with that right now, we need education first. By the way, don’t pay for anything on this site. They will offer you a “credit score” on this site that you can buy, don’t buy it. It is not a FICO score, so no one really cares about it.
For this step I want you to compute your number based off of the balances and limits on this credit report. The first thing most people will notice is that the balance on this report is probably different from what they think should be. That is part of step three. For the purpose of this hint, let’s say your number is 75% Aggregate Revolving Utilization.
Step #3; what to pay and when to pay it. There are two parts to this step, lets tackle the “what to pay first.” Many people that really don’t know much about the FICO scoring system will tell you that there are three separate break points for utilization. They preach that 100% to 70% is one category, 70% to 50% is the next, 50% to 30% and the last being below 30%. So if you listen to one of these people and what they are teaching, if you had 35% utilization they would tell you to pay your balances down below 30% of the limits and you are maximizing that part of your score. This advice is very misleading, incomplete or just flat out wrong.
The easiest advice is the lower the better. The number that I would set for you as an ultimate goal would be 7%. Don’t be discouraged if you compute your number like the example and are at 75% for instance. Work on 10% chunks. Set a goal. Most likely you didn’t get into credit card debt overnight and you probably will not be able to get out of it overnight either. If you are at 75% work to get down to 65% and keep going all the way down to 7% or lower.
The last step is when to pay. Understand that most credit cards have a 30-day cycle. Look at your statements and find the cycle ending date. That date is very important because in most situations that is the day the credit card reports your balance to the credit bureaus. Then they mail you a statement and give you a 21-day grace period to make your payment. So if you are thinking of applying for anything and have the money to pay down balances on credit cards, you will want to make that payment a few days before the cycle ends, if not your score will not reflect your effort.
Knowing these easy three steps will get most of us those 30 points that we are currently losing. Hopefully you will start to understand that improving your FICO score through credit education and/or credit repair can and will work for most of us. Don’t be selfish with these tips, please share them with the people you love or care about, they will thank you.
If you want to learn more about your FICO score or would like to see that score improve, I can help you. Credit repair does work if done by someone that truly knows what they are doing and use credit education as the backbone to their practices.