In today’s world there are many words that we all consider and recognize as curses. Whether it’s the sugar-honey-ice-t’s, the female dogs, the mother-flockers or the f-word. Somewhere in that mix, our economy has added a few others; we now have our Sallie Mae’s, Fannie Mae’s, student loans, ARMs (Adjustable Rate Mortgages), recession, depression, bankruptcy and foreclosure. There’s another word that’s been making its way to the top of the list and its the new f-word! Our dear friend Fair Isaacs or F.I.C.O. as some of you may know him.
For those who are not familiar, F.I.C.O. is a credit reporting system started by the Fair Isaacs Corporation. It is a numerical measurement of your credit worthiness that ranges from 300 to 850. Your F.I.C.O. score is used by most lenders to determine whether or not you can obtain credit so using it the wrong way can definitely feel like a curse. In fact because of lack of financial education and our current economic state, most of you reading this now may feel like F.I.C.O. has done nothing but hinder you.
Your score can stop your from getting loans, renting or buying a home, purchasing a car, opening a bank account or even getting a job. Getting a handle on your F.I.C.O. score is easy if you educate yourself on how F.I.C.O. is calculated then discipline yourself. The five categories that is used to calculate your score are: How much debt you have, Your payment history, Your debt usage ratio (How much you owe in relation to your credit limit), How far back your credit history goes and your mix of various types of credit.
In order to get your credit back on track and keep it that way, there are five things you must avoid:
1) Making late payments
Obviously we should know why this is a big no no but just in case here’s why — Credit is given based on your ability to pay back your obligations on time. making late payments simply shows creditors that you are having a hard time meeting your obligations. late payments stay on your credit report for seven years so its imperative that you avoid them at all cost. if you’ve made some late payments in the past its not the end of the world. As you continue to make payments on time the late payments will have less of a negative impact. the key is discipline and showing creditors you are responsible.
2) Carrying big balances
Most people don’t realize this but creditors usually extend credit to those who they don’t think need it with the hopes that they’ll use it eventually. Carrying a big balance show creditors that you are having issues and are relying too heavily on the credit to get you by. This has a negative effect on your credit score as well as your ability to obtain new credit. As a rule of thumb you should keep your usage down to about 20 percent ie: if your credit card limit is $1,000; you should not carry a balance greater than $200
3) Closing a Credit line
Closing a credit line can hurt you in two ways; First as I stated just a few moments ago you want to keep your usage down to 20%. Closing a credit line increases your usage because you no longer have that credit limit available to you. It can also effect you because you may be getting rid of a rich part of your credit history. If you have a card that’s been open for a while and you’ve been making payments on time it is best to keep that line open. Most people close credit lines because they may have received a new line with a better rate and don’t want to have too much credit outstanding or might be trying to avoid an inactivity fee if they’re not using the card. Keep in mind that you lose more by closing your old lines. Best thing to do is to call your current credit line provider to negotiate a lower rate or fees.
4) Having too many credit inquires
Anytime a creditor checks your credit it effects your F.I.C.O. score by 5-15 points. The deduction in points may only last for about six months but it is still important to use caution. Be extra careful when financing a car. Car dealers usually run your credit with multiple banks in an attempt to qualify you and get you the lowest rate. While this may seem like a noble cause this has an adverse effect on your credit and can cause serious damage. Keep in mind that you can check your credit as much as you want yourself without any effect to your credit score. With that in mind I suggest that you know your score whenever going anywhere to obtain credit and inform your potential creditor of your score prior to applying to anything.
5) Defaulting
Defaulting on any type of loan or credit card is the single worst thing you can do to your credit. Defaulting will surely get you declined for any new loans and should be avoided at all cost! If you ever foresee that you can’t meet some or all of your obligations it is imperative that you reach out to your creditors as soon as possible. Most will be willing to work with you.
All in all F.I.C.O. can be your friend if you treat him right. Treat him wrong and he will become your worst nightmare