FICO and Fixing Your Credit

     In 1989, The FICO SCORE was released to the world by William R. Fair and Earl Isaac, who founded a computer software company.  They developed and sold their first credit system back in 1958.  FICO (short for the Fair-Isaac Co.) was the first credit-risk model that provided a universal and impartial tool for evaluating consumer risk.  The FICO SCORE is a three-digit number (between 300-850) based on credit data from your credit reports.   It helps lenders predict how likely a person is to repay a loan.  Over 90% of ALL credit decisions made in the USA today use the FICO SCORE!

     A good FICO SCORE can literally save you THOUSANDS of $$$$ in interest and fees to lenders.  A good FICO INSURANCE SCORE (FICO homeowners scores range from 200-997) can save you BIG $$$$ on your homeowner insurance premiums.   It can also save you BIG $$$$ on auto insurance premiums (FICO auto scores range from 250-900) depending on what state you live in.  Using credit scoring for auto insurance is banned in California, Hawaii, and Massachusetts.  Other states have restrictions but not an outright ban.  One should be over 700 on both scores.

    To improve your FICO SCORE, we must first examine the FICO “Scoring Formula.”  Fico data is grouped into 5 categories:

1. PAYMENT HISTORY: (35%) Payment history refers to whether individuals pay their credit accounts on time. Credit reports show the payments submitted for each line of credit, and the reports details bankruptcy or collection items along with any late or missed payments.
2. AMOUNTS OWED: (30%) Accounts owed refers to the amount of money an individual owes. Having a lot of debt does not necessarily equate to a low score. Rather, FICO considers the ratio of money owed to the amount of credit available.
3. LENGTH of CREDIT HISTORY: (15%) As a general rule of thumb, the longer an individual has had credit, the better their score. However, with favorable scores in the other categories, even someone with a short credit history can have a good score. FICO SCORES take into account how long the oldest account has been open, the age of the newest account, and the overall average.
4. NEW CREDIT: (10%) New credit refers to recently opened accounts. If the borrower has opened several new accounts in a short period of time, that indicates risk and lowers their score.
5. CREDIT MIX: (10%) Credit mix refers to the variety of accounts.  For example, credit card, retail card, home loan, vehicle loan, etc.  It is helpful to have a few categories of debt; however, it is NOT necessary to have a card in each category to score well.  For more information go to MYFICO.com.

     Now that we have broken down the FICO “Magic Formula,” consider using these “Lucky 7” tips to improve your credit rating; hence, improving your FICO SCORE:

1. DO NOT CLOSE OLD ACCOUNTS: While this might seem counterintuitive, closing a card may negatively impact your credit. It reduces your credit-to-debt ratio and credit history which lower scores.
2. CONSIDER ASKING FOR AN INCREASE TO YOUR CREDIT LINE: For example, if you have a credit limit of $5,000 and you are using an average of $2,500, that is a 50% ratio.  If you asked and were granted an increase to a  $10,000 limit and keep your spending at $2,500, you lowered your “Credit-Usage” ratio to 25%, which will increase your score over time. 
3. LIMIT THE TOTAL AMOUNT OF CREDIT CARDS: People are tempted by all the enticing initial credit card offers and frequent flyer points; however, applying for too many cards will lower your score.
4. AVOID FEES: Credit card companies charge exorbitant fees (they can be as high as 36%, depending on what state you live in) for late payments, even if it is only by a day or two.  Making late payments may trigger a higher interest rate and will lower your scores quickly.
5. PAY OFF 100% OF YOUR BALANCES EVERY MONTH: Carrying over balances from month to month is a costly way to do business.  If you have issues with this, I suggest enrolling into “auto-pay” on-line, one credit card at a time so you can stabilize your finances.
6. REVIEW YOUR CREDIT AND FICO SCORES: Step one is to determine your starting point.  This is easy to do on-line.