Bad Credit Repair

Having a healthy credit score is essential to getting good interest rates on future purchases and loans. The system for determining the infamous FICO score was devised by (and named after) the company Fair Isaac and Co. It is the rating system used by almost all creditors today to gauge your financial trustworthiness.

Other factors, aside from your FICO score, also make a difference when creditors and lenders are looking into your application. They might base their decision on such things as how long you’ve been living at your current home and how long you’ve held your current job.

Still, your credit score is the primary measuring tool that creditors use to see how much money to give you or what interest rates to attach to your loan. Raising your FICO score is no easy thing, however, especially if you have large outstanding credit debts on your report.

If you’re wondering, “How can I repair my credit?” the first thing you have to do is get a basic understanding of how the FICO credit rating system works. Once you’ve done that, you can begin planning out a strategy for eliminating debt and raising your credit score. A lot of the information you need is freely available online and at the Fair Isaac and Co. website, so you don’t really have to pay for professional credit debt counseling or enlist the often expensive services of a debt management company unless you want to.

How the FICO rating system works

About 35 percent of your credit score is determined by your payment history. The most important thing to do when trying to raise your score is, quite simply, to pay your bills on time. How often you’re late in paying your credit card bills, your mortgage, student loans, etc., is the biggest factor affecting your credit. The more late payments you have and the later you make them, the more you will hurt your FICO score.

Another 30 percent of it is based on the amount of money you owe. The bigger the amount, the lower your credit score will be. The best way to improve in this area is to pay down your loans. Make more than the minimum payment so that you can start reducing your debt. A good strategy is to start paying down the biggest debts. However, it will do no good to transfer money from one credit card to another, as the score depends not on individual debt balances, but on your overall debt balance.

About 15 percent of your FICO score is dependent on the length you’re your credit history. This is a hard one to improve on, as you can’t really speed up time. New accounts will stay new for a while. The best way to approach this issue, if you have several credit accounts that need fixing, is to pay off all of your new accounts and then close them. Leave the two or three oldest accounts open. This will increase the average length of your credit history.

If you have no credit history to speak of yet, open one or two accounts and stick to those for a while before opening up new ones. Make one a revolving account (i.e. a credit card) and another one an installment loan.

About 10 percent of your score depends on newly acquired credit. This means that opening up several new accounts at once will hurt your FICO score, even if you’re making on-time payments on all of them.

Coincidentally, making too many inquiries about your credit score within a relatively short span of time will lower your score, as it indicates that you are perhaps preparing to open new lines of credit and go on a borrowing/spending spree. According to Fair Isaac and Co. inquiries made by lenders into your credit history will not affect your score if they were made without your permission.

Another 10 percent of your score depends on the kind of credit debt you’ve acquired. Open-ended credit, or revolving credit, refers to things like credit cards, which have no fixed number of payments. Car loans and home loans are called installment loans because there are a certain number of payments to be made, after which the loan is closed. To raise your score, you have to show that you’re handling both types of loans well. Opening new accounts to show that you’re responsible, however, will not offset past years of bad loan management on your part.