Improve your Fico Credit Score and Save Money in the Long Run

By: Gus Mackie

Your credit score, or FICO score is a very important number when banks, and lenders determine your credit worthiness. The score can range from 300 - 850 (perfect credit), with most people falling between 678 and 725. FICO score is a risk based model that helps lenders determine the level of a borrower's risk. The lower the FICO score the higher the applicant's risk. As a result, people with lower FICO scores can expect to pay much higher interest rates when borrowing money.

For example, a person with a 760-850 FICO score could lock-in an interest rate of about 5.6% - 5.8% on a 30 year fixed mortgage at $215,000 (total amount of loan would vary depending on income), resulting in a monthly payment around $1265. If the same person had a FICO score around 620, they could expect a much higher interest rate of about 7.25% - 7.50%, resulting in a monthly payment of about $1500. The difference is about $235 more a month!

In order to understand FICO scores, you must understand the key components of the score. FICO scores are comprised of five factors, with varying levels of importance, these factors are:

* Payment History (35%) - Making your payments on time - making payments 30-60-90 days late will have a negative impact - Repossessions, Charge-offs, Forecloses, Bankruptcies, and Judgments can have be devastating to your FICO score - they remain on your credit report for up to seven years.

* Total Debt (30%) - Having too much debt in relationship to your available credit can be damaging to a FICO score

* Credit History Length (15%) - establishing and maintaining lines of credit for 2 years or more years is favorable

* Amount of New Credit (10%) - Too many inquires or new lines of credit could indicate that a person having financial difficulties and lower your score

* Types of Credit (10%) - Maintaining a good healthy mix of credit types, including; mortgage, unsecured credit cards, and secured/installment loans (auto loans)

A few suggestions to improve your FICO score:

Pay your bills on time - This is the most important aspect of maintaining your credit score. Once a payment is more than 30 days past the due date, it is looked upon as being unfavorable.

Reduce your total debt - This is very important when it comes to credit cards. When your FICO score is calculated, the total amount that you owe is compared to the total amount that you have available to use. If you consistently maintain balances at or near your limit, your score will go down. One strategy is to ask your current credit card company to increase your limit. At the same time, try to pay down your balance to about 30-40% of the total available credit. Lenders like to know that borrower's have a "cushion" to work with.

Only apply for the credit you need - Every time you apply for credit, an inquiry will be placed on your report. Too many inquiries in a short period of time will reduce your score

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