5 Simple Steps toward a Higher Credit Score

Are you looking to take out an auto loan—perhaps you’re seeking a mortgage for the first time? For whatever may be the case, if it involves the extension of credit, you can be certain it’ll involve pulling all three personal FICO scores from Equifax, Experian and Transunion, the nation’s big three credit bureaus. There are literally thousands of tips on ways to improve your credit scores. Simply known as FICO scores, credit score enhancement has largely become “big business.” When you factor in the overall savings which, through favorable rates, are bestowed upon individuals with credit scores of 720 and above, there’s no wonder why the average American have become obsessed with this three digit number. Unbeknownst to many, credit score enhancement isn’t as complex as many are lead to believe. The following list below highlights five simple steps which can be used to enhance any credit situation:

Step1: If You Don’t Have Any Credit…Establish it

First the good news: if you don’t have any credit, then you don’t have to worry about paying those annoying bills. Now for the bad news: if you don’t have any credit, you also don’t have a credit history. Why should you be concern? Three reasons: 1) If you’re not using credit on somewhat of a monthly basis, it can be quite difficult for FICO to generate you a credit score, 2) If you don’t have a credit score, it becomes impossible for creditors to judge your financial responsibility; and more importantly, 3) If you don’t know your credit score, then you can’t improve on it. The next logical question is, “How does one establish credit? The short answer is with credit cards. Caveat Emptor: “Not All Credit Cards Are Created Equal!” Moreover, with no prior credit history, obtaining a credit card with good terms becomes more of a challenge than anything else; therefore, you’re only option at this particular point holds with obtaining a secured card, a special kind of security deposit credit card reserved for individuals rebuilding or, in your case, establishing his or her credit for the first time. With secured credit cards, you charge up to the amount of your original deposit. It’s that simple. After an initial probation period of about 12-18 months, showcasing your financial responsibility through on-time payments, the card will usually convert to a regular unsecured credit card status.

Step2: Whatever You Do, Don’t Miss a Payment

If an individual with a 520 credit score misses a payment, FICO doesn’t seem to care, but if an individual with a 720 misses a payment, he or she can be penalized as much as 50 to 100 basis points. Why is this so? This is so because the FICO scoring formula is designed to punish individuals with the most to lose. This is why it’s so important to pay your bills on time, as one late payment could mean the difference between that dream vacation to Paris, France or a quick jaunt to your local shopping center’s fragrance department. Sound’s weird, huh? Nonetheless, the truth of matter is that the FICO scoring system doesn’t care about race, color, creed, religious beliefs, or income standing; the FICO formula, as concocted from pure mathematical theorem, is solely design to give points to individuals who exhibit good financial behavior and take away points from individuals who don’t.

Step3: Analyze Your Credit Reports on a Monthly Basis

A credit report isn’t only a comprehensive look into an individual’s financial past; rather it also serves the purpose of being a snapshot of individual financial behavior at this particular moment in time. Not only will potential creditors discern your payment patterns, but they also may want to see your ability to handle numerous debt obligations, (delving into a consumer’s credit utilization ratio, which is the amount of credit used versus the total credit available) to determine how you handle numerous financial obligations. Good credit score rule#1:”Don’t Forget to Pull 'All Three' Credit Reports!” Pulling all three credit reports will entail performing what’s called a personal credit analysis, a credit review process which serves to identify discrepancies on any account that’s marked as negative. How does one obtain his or her credit reports? As headed by Experian, Equifax and Transunion, consumers now have online access to his or her credit report from AnnualCreditReport.com, a quasi-government operated website that came into existed after the passage of the Fair and Accurate Credit Transactions Act (FACTA), an amendment to the FCRA passed in 2003, which allows consumers one free credit report per year.

Step4: Establish Your Plan of Attack

Analogous to a financial war, consumers must first understand that battling excessive debt burdens isn’t some one night quick-fix affair; rather you should be prepared for a long drawn-out war. It doesn’t take one night to accumulate excessive debt; therefore, it won’t take one night to get rid of it. To put it bluntly, excessive credit card debt is a type of debt on a mission of seek and destroy; and unlike a mortgage or a student loan, credit card debt can do a lot of damage to an individual’s credit history, tarnishing your personal finances and credit scores like a vicious financial storm. In this same vein, your plan of attack simply entails picking up the pieces, and realizing that the damage has already been done.

Step5: Wait…Don't Close Those Ugly Accounts Just Yet

In an effort to rehab their credit profiles, many consumers ask themselves the following question: “Should I close these not so 'good looking' credit accounts?" Wait…not so fast! Again, here’s the $10 million question you must also ask yourself: “How will this affect my FICO scores?” The answer is—it depends. Again, FICO isn’t some man or women grading each individual tradeline (e.g., charge account) on your report for its societal value. If you have a seven year old tradeline and simply want to dump it because it’s not associated with a prime credit card, then that decision could come back to haunt you. In fact, a decision to close a charge account of any kind can have an adverse effect on your FICO scores.

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