Credit scores are critical when it comes to applying for a credit card. They usually show your ability to repay loans as per the agreement with your creditor. In short, they show your creditworthiness. Credit scores are also called FICO scores since the system used by the credit bureaus is from a statistics company called FICO. The scores range from 300 to 850, with 300 being the worst and 850 the excellent. Various factors contribute to FICO scores, as we shall see later. You will also learn how to fix my credit score in 6 months shortly.
Sometimes you may fall into the bad score menace, whereby you get bad scores that can affect your borrowing ability. With poor borrowing history, very few financial companies will be willing to lend you money because of the fear that you will default. After all, who would like to risk their funds to someone not likely to pay back the loan? However, it is possible to regain your lost glory by observing various measures.
You should always have in mind that you should get a loan or a line of credit with clear guidelines on how you will repay the loan. People find themselves in the menace of not being able to repay a loan due to a lack of prior planning on how they will repay a particular loan. You end up in the bad score category not because you did not want to repay your loan, but because you lacked money.
Who calculates credit scores and how?
I suppose you are asking yourself where FICO scores come from. The government of the United States has three main bodies that deal with score calculation. They include;
- TransUnion
- Equifax
- Experian
All three companies use the same score calculation format and receive data about borrowers from all financial companies in the country. They then use them to calculate scores and compile credit reports. The question is, how is the credit score calculated?
According to FICO, the calculation of scores relies on various information about your credit usage and repayment behavior. These include your payment history, new credit, credit mix, the amount owed, and length of credit history. Let us look at each one of them.
i) Payment history
The payment history occupies 35% of your overall scores. Your borrowing history occupies that large portion because every lender wants to know whether you paid your past debts on time. The creditor can decide whether to give you a loan and how much. If you have been using loans well in the past, the issuer can trust that you will pay your loan.
ii) Amounts owed
Another factor contributing to your overall score is the amount owed per given time. If you have many credit accounts and owe money on them, that does not mean you are a high-risk borrower. Having several credit cards is recommended to have many financial companies reporting to the bureaus.
The only problem is when you use a lot of your available limit as financial companies can interpret you as a higher-risk borrower with a potential to default on loans. Amounts owed contribute up to 30% of your overall scores.
iii) Length of credit history
The length of your credit history means how long you have been using loans and lines of credit. It contributes up to 15% of the total scores per given time. If you have a long borrowing history, the borrowers will see you as a low-risk borrower so long as you have been repaying your previous loans on time and at the right time.
iv) Credit mix
If you mix various credits, you will get 10% of your total scores. You can have various credits such as credit cards, retail accounts, personal loans, and mortgage loans, among many others. You might not have all kinds of credits, but having several is nice to ensure that you get substantial scores.
v) New credit
The portion contributes up to 10% of your scores. New credits affect your scores negatively due to the hard inquiries you make within that period. To ensure that your scores do not deteriorate quickly, make sure you do not apply for many credits within a short time.
How to fix my credit score in 6 months?
If you have bad FICO scores, you must contemplate how you can improve them to qualify for better loans and lines of credit. I want to show you how to improve our scores within six months and start enjoying better interest rates and limits on loans and lines of credit. There are various activities one can do in the process. They include the following.
1) Pay all your debts
The debts from your previous borrowers can pull you down to a significant extent. If you know that you have debts with your borrowers, you should settle them immediately as a way to embark on your journey to grow your scores.
When you clear the debts, your creditors report your payment to the bureaus to have your defaulting recordings cleared. If you wonder how to repair your credit score fast, clearing all your debts is good to ensure that you will see an increase in your scores.
2) Check your credit report for errors
You might be suffering from bad scores, yet it is not your fault. There can be errors in reporting whereby a financial institution gives the wrong details about your score usage. That way, you will end up with the wrong scores. Also, you may have bad scores due to identity theft.
Suppose someone uses your identification document to open an account and take loans. In that case, you will have bad scores if they default. Having such data erased from the credit bureaus can quickly boost your scores.
3) Get a secured credit card
A secured card is good for building your credit from scratch or a bad credit scenario. The card requires you to deposit money and borrow against it since the funds act as your security deposit. When you default, the card issuer can recover their funds from the security deposit.
The more you deposit, the higher your borrowing limit. While you use your credit card, the issuer reports your usage activities to the bureaus. Remember that any credit card increases your scores. However, the secured one is the easiest to get, irrespective of your FICO scores.
4) Mix your credit
If you are trying to grow your scores, you can get as many credits as possible. Remember I mentioned that credit mixing increases your scores by 10%. You can get personal loans, auto loans, credit cards, and any other credit to have many creditors reporting to the bureaus.
5) Become an authorized user
If you have a relative with excellent scores, you can request them to allow you to become authorized users of their credit cards. That way, your scores rise as you utilize the cards. It is one of the best ways to build scores from scratch.
6) Keep all your cards active
Getting several cards and storing them in your house will not help you. Getting credit cards from several issuers can indeed improve your scores. However, you must keep the cards active. If you have been keeping the cards under your shelf, go and dust them to begin using them for your transaction activities. Make sure you spend some amount from each card every month.
7) Get a credit repair company
Another option you can increase your scores within six months is getting the best credit repair company to deal with all the processes of improving your scores. Credit repair companies usually do a thorough check on the various reasons that lead to the poor scores category and develop ways to deal with the issues amicably.
They first get your credit report since it contains all the details about your past borrowings and then clean up the mess on your behalf. The companies charge fees to execute the activities. Examples of credit repair companies you can use include the following.
- Credit Saint
- Lexington Law
- Ovation Credit Repair
- Sky Blue Credit
- The Credit People
- The Credit Pros
- Credit Versio
Can you get a credit card with no FICO scores?
If you have no scores, you can get a credit card. Secured cards are the best cards for people with no scores. Almost every financial company issues secured credit cards to build credit. First, you need to research the best credit card to apply for and get it through the most appropriate means.
Most credit card issuers allow one to apply for a card online and get it at your physical location. Even the security deposit is easy to make online when adding a funding source to your card account. When your scores improve, you can get an unsecured card and get your deposit in your account.
Bottom line
FICO scores are figures that show your ability to repay loans. There are three main bodies that calculate scores: Experian, TransUnion, and Equifax. They check various things to calculate your scores, such as your payment history, credit mix, length of credit, new credit, and the amount owed. If you repay your loans as per the agreements with your creditor, you will always have good scores. There are ways to improve your scores as well.
