Ways to Improve the FICO Score

Since the method involved in calculating the credit score is essentially nothing but a 
complicated formula, one can change the score by causing changes in the variables that are important factors in the equation. There are several approaches to accomplishing this, some of which are:

Credit Counseling

Various credit counseling organizations are available for consultation and the services they offer are usually free of charge. Mortgage professionals however do caution that    using a credit counseling service may negatively affect your credit report.

Credit repair

There are many credit repair organizations also that exist which offer their services free of cost; however these organizations have been found to employ less standard solutions. Hence, many websites recommend against using credit-repair organizations, since they claim that the tactics adopted by these organizations are illegal.

A typical example of such an illegal credit repair approach is to obtain what is known as an Employee Identification Number or EIN and use this while applying for a credit; this Employee Identification Number is the same length as a Social Security Number and is tied to your name in the same way. This practice is illegal however and a blank credit report often looks just as bad as one with a derogatory item on it. Some credit repair organizations claim to be able to accomplish immense improvements in scores in very short periods of time. The costs involved in these repair activities are usually prohibitively high and the results are not usually guaranteed to be desirable.

Help Yourself!

It helps to believe that you can trust yourself and your intuitions to try and make things better. Though professionals may have useful advice, there are a number of ways in which the individual himself or herself can help oneself to improve the FICO score. However, because the exact formula is not known, the following suggestions are not guaranteed to be sure shot successes, but nevertheless are likely to result in a better credit score:

Check Credit Reports to Eliminate Flaws

This is the first strategy to pursue in order to improve a FICO score as recommended by almost every credit repair organization and credit bureau. Over and above this, you could employ all or some of the following methods:

1. Get your free annual reports by writing directly to the credit bureaus, or going to the website www.annualcreditreport.com.

2. Locate any inaccuracies in your reports; this often helps since credit reports have a notorious reputation for having a substantial amount of inaccuracies. Check all bits of information, not just information marked negative since even seemingly harmless incorrect neutral information can weigh negatively on your report. For instance, if your credit limit is stated incorrectly low, it will appear that you are using a higher percentage of your total capacity which would in turn lower your score.

3. Bring to the notice of the relevant authorities and dispute these inaccuracies as soon as you can. You may take the matter up with the creditors directly or with the bureaus. Creditors often tend to have live operators while bureaus do not, so you can choose as to whom it would be easier to for you to contact.

Many sources recommend filing disputes with bureaus through certified return receipt mail and prefer this mode over the one involving creditors. Disputes can also be filed on the credit bureau's websites, although the options are not very flexible on these sites. This generally works for information that is genuinely bogus.

Punctuality

It is needless to say that punctuality will help improve your FICO score. Although punctuality may not help in the short term, over the course of some time, say a year, paying bills on time will increase your score by roughly 30 points, and more importantly, will prevent your score from dropping further.

o Paying bills on time is important, since any payments more than a month late will affect the credit score. You need to note that a bill issued on March 15 with a due date of March 31 for instance, does not become a month late until April 30; however, if you have the means to pay, it is best that you do so earlier rather than later. Even a single late payment can result in a drop in your credit score by over 20 points!

o Payments made after the due date have an increasingly bad effect on your score, so it is best advised to pay off late bills as soon as possible, you can also try negotiating with service providers to have derogatory remarks taken off your report. In addition to this, ensure your account does not get into the collection department's lists since having such accounts are much worse than late payments. Accounts usually go into collection status after about six months of non-payment which means you have ample time to ensure you do not enter this bracket.

o Set up as many automated payments as possible since forgetfulness is definitely not reason enough to compromise on a good credit rating! This will help avoid neglecting to pay a bill in the future, one must however remember to maintain enough funds in the bank account while making such payment commitments and also ensure that the address for each of your accounts is updated from time to time. Payments made via the internet are also much quicker and safer than relying on the postal service to get your payments across in time.

o Paying bills before the due date also helps better your score, since this will lower the total interest charged, which in turn would reuduce your debt to credit limit ratio.

Removing Derogatory Statements

o It is important that one never gives up negotiating with collectors and businesses to remove any late payments or collections statuses from a credit report. Often, collectors are more than happy to take negative notices off a credit report in exchange for prompt payment. It is also important for consumers to obtain any such agreement in writing, since once the collectors have been paid off it is next to impossible to have these derogatory statements removed.

o Be aware of the statute of limitations on any debt you are attempting to clear by dispute and in such a scenario, contacting a collector may be akin to awakening the proverbial sleeping dog. The statute of limitations is defined as the period of time set by a state's law, within which a creditor may file a lawsuit to enforce its legal rights. Once the period of the statute has expired, the creditor can no longer sue on the account.

For instance, if you live in California, which has a four year statute of limitations on written contracts, and your last payment was due on May 20, 2002, but you failed to make that payment, it is advisable to wait until May 21, 2023 to contact the collector to dispute, or attempt to negotiate the payment of a small amount in an attempt to settle the debt and have them delete the account from the credit agency records. In addition to this, if the creditors know the statute has run over, there is a possibility that they may be less inclined to even respond to a dispute. If this occurs, the credit reporting agency must delete it from your record. It also helps to be aware that in many states making even a small part payment on the account or even, in some cases, promising to make a payment, may cause the statute's time period to start all over again, which would not be the most desirable of situations.

o It is common sense to realize that businesses usually remove negative remarks in exchange for more business. This tends to work best when the credit branch of the business is closely connected to the sales branch, and when you happen to be a significant customer. Businesses understandably, often have little interest in preserving the accuracy of a customer's report for other businesses to review.

o If you have federal student loans that fell into default, it might help to pursue loan rehabilitation policies. Labels of collection or default can be removed from a loan's history with regular payments over the course of a year, however, this needs to be arranged for ahead of time.

o Per-campus student loan programs do often make exceptions and remove negative remarks if you manage to find the right person to take care of this for you. A good justification for a late payment like non receipt of the bill never hurts and might just see you through, but also do remember that most excuses do not have legal merit and you can surely expect responses which imply that it was your responsibility to pay, even if the bill never arrived. It is vital to appear appealing to human decency and sense of campus community and in spite of this if lower ranking officials refuse to help, letters to higher ranking campus officials do usually find success.

o You have nothing to lose by being polite, especially when you are at the receiving end; it helps to remember that nothing is gained through combativeness or disrespect.

o When none of the above work, the only option you are left with is to threaten and / or pursue legal action. Collectors and businesses have nothing to gain by reporting negative information about you and would never do this with the intention of maligning your financial character. Moreover, since even a minor legal interaction can cost thousands of dollars, most businesses and creditors would rather remove items than deal with a lawsuit.

o If none of the above approaches apply or if you are faced with failure while trying to implement each of the modes listed above, you are left with the option of filing disputes of negative marks on a credit report. Even if the negative marks are accurate, some creditors do fail to respond to disputes in a timely fashion, which in turn removes negative marks. Rather than pay the postage it takes to respond, some creditors tend to disregard any communications regarding paid accounts. It is considered mail fraud to falsely dispute an item, but as long as you claim to believe an item was never late, you can surely feel free to dispute.

Decreasing Credit Capacity Used

Decreasing the ratio of debt to credit capacity consists of two major approaches which are of increasing the total capacity and decreasing your debt.

o It helps to strive to increase limits on credit cards. The FICO formula weighs the ratio of balances to the total available credit, hence if credit limits are increased while balances stay the same, this ratio drops and your score will increase. If possible, one must also try to increase limits without triggering credit checks, as a credit check may drop the existing score by a few points.

o Use your good relationships with banks and other businesses to your advantage. Banks have been known to remove late notations for good customers. When a consumer is turned down for credit cards elsewhere, such bank will often provide a low-limit credit card. This card will increase capacity by decreasing the capacity used ratio, even if it is only by a small amount.

o Consider the option of secured credit cards, these cards factor into credit scores in a manner identical to unsecured cards. If a consumer opens a $2000 secured credit account, the resulting credit report will make it appear that someone has trusted that consumer enough to extend him or her credit, and thereby increase your capacity by $2000.

o Pay down the sum of all balances without fail so that you are using the least total capacity. For instance, using only 30% of your capacity will trigger a reduction in score; 50% is more severe, and can cause a drop of over 10 points while 75% is a severe red flag. A revolving balance of 0% has a slightly lower benefit as compared to a small percentage.

o It also helps to pay down each individual balance. It makes sense to move balances between cards so that no single balance is at more than 30% of its capacity at any given point in time. The 30% line may at times be difficult to reach, in such situations try to increase credit limits, or at least reduce card balances to less than 75% of capacity. This however contradicts the advice many credit companies give while trying to rope in new customers to transfer balances, since managing line usage below these thresholds will lead to a higher score than consolidating everything into one credit line and roughing it out. This will require more bills to be paid each month, which in turn requires extra work on the part of the consumer.

o If you are considering a mortgage refinance, you may be able to move some credit card debt to your home loan or at other times by withdrawing equity.

o You also need to keep an eye on how student loans are reported since these loans have a notorious reputation of being reported multiple times, making one's monthly payment obligations look much higher than they actually are. This can both have both positive and negative effects - while a credit report will show more obligations, on the other hand if these loans are in good standing, you will show a good repayment history. If a loan is reported as paid late multiple times, you need to ensure the removal of duplicate entries of negative remarks.

Minimize Damage in Tough Times

o Attempt to negotiate with your creditors, discussing your situation and expressing the willingness to pay often goes a long way in salvaging the situation. If you can commit to a firm repayment schedule, creditors have been often found to be more than willing to skip reporting any delinquency.

o If you have lapsed or failed to pay on time, sometimes the lender will forgive late fees and marks under certain conditions that they deem to be genuinely worthy of an excuse. Typically this implies that you have not abused this privilege and that, you have paid a reasonable sum, and requested that the late charges be forgiven. This may also prevent them from reporting it to any agencies. The best you can do to avoid this situation is, if you know that you will not be able to make a payment on time, make arrangements with the creditor in advance as soon as possible.

Limit Credit Enquiries

o Avoid causing inquiries to be posted to one's credit report since credit score is affected adversely by recent inquiries made against one's credit report for the purpose of evaluating an applicant for creditworthiness, including insurance. The credit score is not affected by obtaining a copy of one's own credit report, neither is it affected by promotional inquiries made by direct marketers such as credit card companies who send out prescreened direct mail offers; and not even by account review inquiries made periodically by your own financial institution to manage the ongoing risk of your account. Only the action of applying for new credit or insurance creates a hard inquiry, as it is termed, on one's credit report which affects the score. This normally drops a FICO score by roughly 5 points, which remains for as long as two years.

o While applying for credit, ensure you refuse to allow the creditor to check your credit until the latest possible stage of your transaction. While shopping for a mortgage for instance, it helps to generate your own FICO score and use that score in discussions.