10 Tweaks To Improve The F word (FICO)

[MortgageBusterDave]

Hello all, I am Dave and this is my first Christian PF thread posting, I found out some threads within this Forum that really helped people, and it encouraged me to share too.
I enjoy searching and investigating personal financial information, first because it fascinates my, and second since ignorance is too expensive and I can't afford it.

Unfortunately the weakest people (financially) are getting the lowest FICO scores so they are paying much more to the lenders - which makes them even financially weaker over time. Here is an example of this negative wonder wheel: How FICO score affects mortgage payments.

I have decided to do my best, to help readers here too, as some of them might be already spinning inside this wonder wheel.

So much has been written here about the FICO score, but still to many ignore the fact that even little adjustments can save money and lower the monthly payments.

Too many people overlook the fact that they could be saving up to $25,000 with a small change (30 points) up within their FICO score. Even small change may implement directly on the mortgage rate you will be offered, and thus the amount of money you will be paying for a mortgage loan.


The whole FICO score is all about risk management, once this point is clear raising the FICO is a mission many people should do easily, unless they are too rich to care about their money washed down the drain every month.

If you where the lender and had to give someone you do not really know $300,000 what would you like to check before you proceed with the transaction? Of course that they could pay you back! And on time, with no 'monkey business' and fooling around.
This is FICO. An algorithm to predict how risky it would be to lend you money, and what are the chances that you will pay it out on schedule.

Here are ten tweaks, any one can handle to gain some more points in the FICO score:

1. 1. See the FICO report - It's FREE, once a year to see the report. You will not get the score, just what information has been gathered on your records. If you do not know what is showing there, how can you fix it??
   
   2. Get the report from all of the three bureaus: Equifax, Experian and TransUnion. Since you can never know to which bureau the lender will turn to get your score from, and different values can be recorded on their data, it is worth to see and manage them all.
   
   3. Change inaccurate data - Once you check the reports thoroughly, you will find inaccurate data which is stored on them. It may begin with wrong personal data, and follow to inaccurate credit information. For example you may find that the credit limits they know of are not the correct limits you received from the credit companies! It might take some time for you to write a few letters, but you have the right to dispute inaccurate information by the federal Fair Credit Reporting Act (FCRA). Inaccurate information must be corrected or deleted.
   
   4. Pay credit payments - Well it is obvious.. but most people pay the wrong payments. The FICO score is based on many factors, one of them is 'how much of your credit are you using'... this factor part contributes up to 30% of the FICO score, under "amount owed".
   While most people may choose to pay the payments with the higher interest rates, it would be wiser to spread the payout so on each credit your usage the credit will be lower than 50% of the credit limit (less than 30% is even better).
   This is why the data investigation is so important, think that you know your limit is $5000, while Equifax was informed it is $3000. If you use $2000... As far as Equifax sees it, you are using 66% of your credit - which makes you 'risky' and your FICO drops.
   
   5. Ask for credit limit raise - Just to complete the last tip. If you are a rather good customer, without any particular problems, you may want to ask your credit company to raise your limit.
   You do not do that to spend more money(!) but if FICO is all about numbers, why don't you play the game too. If your credit limit is raised from $5000 to $8000, using the same $2000 will now show as 25% usage (instead of 40%) and your score suddenly gets wings..
   
   6. Close 'open doors' behind you - It might be you had some dispute with the cell-phone company about calls you where charged of but did not make. Some payments where left open till the dispute is handled by customer support. Now is the time to pay all those debts, (even the cell-phone company have already forgot all about it). Those unpaid bills have no Astrix* beside them. It is black or white - yes/no, either they are cleared or they are not.
   
   7. Show you can handle different kind of credit lines - The lenders know nothing about you, except what they learn from the FICO score. But if you have only one type of credit, your FICO score will be lower, as there is no history data how you coupe with different kinds of credits. There are three types of credit to show you know to pay back. Mortgages (long term loans) car loans (or any other mid term loans) and credit cards (revolving credit).
   As far as the bureaus sees it, having only one credit type, makes you risky (unpredictable) customer. So instead of getting another credit card for new credit, it would be wise to show some diversity, get a short term installation loan instead. If you pay it back regularly, you are now more predictable with two credit types, so the FICO will rise.
   
   8. Do not close old credit cards - There is a misconception concerning old credit cards. People hurry to close old cards and get new credit lines to show they have new credit. But the FICO algorithm is a risk management algorithm, and in risk management calculations even 'bad history' is better than 'no history'.
   History shows the credit bureaus you are not new to credit debts, and even if you had missed payments you 'where there'. A new credit line is a 'black hole' for them, and 'black holes' means risk... So take out your old credit card and use it from time to time, just to show you have it.
   
   9. Goodwill Adjustment - Everything can be forgiven. Unless you are a credit criminal and are trying to scam the credit companies, asking for goodwill adjustment may be a surprising solution. Let's say you are a fair customer, but long ago you had a missed payment. You can request from the lenders company or the credit company to have a goodwill adjustment and delete that missed payment off their records. Then you make sure it is reported to the credit bureaus. Everyone can forgive a glitch, so can they.
   
   10. Use payments reminders - 10 years back having all sorts of payments might have been more difficult to manage. Today, most lenders offer payment reminders, they can be text messages (SMS) or emails or smartphone apps. An unpaid bill or payment will stay on your credit record for 7 years! Help the lenders, help you manage your payments - It is both sides interest you will be paying on time.
   
   I am sure there are more tweaks you can use to improve your credit score, this process takes time, there are letters to be written, and fine print to read. But every 20-30 FICO points are worth thousands of dollars annually that could be left in your pockets! Do not leave it because you think it doesn't matter - It does. The most important thing is to take action! and the best time to start is right NOW.

[DerrikCFP]

Thanks for posting, Dave. I hope that you get a lot out of the forums. They're a great source for advice.

You may find that people on these forums are less focused on a good FICO score and more on getting out of debt so they don't need to ever rely on a FICO score.

Derrik Hubbard, CFP
www.yourfinancialpurpose.com/blog