Improving Your FICO 08 Credit Score

Establishing and maintaining a good credit score is important in our modern world; the ability to get a credit card, auto loan, mortgage, rent an apartment, and sometimes even one's career advancement depends on one's credit score.

Due to the changing ways that we, the consumers, have been using credit, the FICO credit scoring system is being changed. Dubbed FICO 08, the fourth revision of the FICO credit score formula, the latest revision to the formula will help some while hurting others. Expected to be in use by summer of 2008, this latest revision will change some of the tactics that one uses to build up a higher credit score.

This revision closes the loophole that allowed a person to be "piggybacked" onto someone else's good credit rating. Originally a way for authorized users of a credit card to establish or maintain a credit rating, such as college students and wives, this loophole was exploited by credit repair companies. Charging a consumer with bad credit a fee (normally around a hundred and fifty dollars), the credit repair company would rent an authorized user slot from a person with good credit; by putting their client into the authorized user slot, they could boost their client's credit score by approximately one hundred points. This tactic will no longer work with the revised FICO 08.

This means that people trying to establish or rebuild their credit score will have to go the more risky route of joint accounts (making them equally responsible for the account) or having to use secured credit cards and other non-prime credit products. Those who are consolidating their accounts under one name, such as women getting married should consider joint accounts instead or perhaps keeping open a couple of accounts under their own name in order not to destroy their own credit rating.

The basic way to boost one's credit score with the new FICO 08 formula is the same as with the older formula: use credit wisely. The new formula looks for evidence that you are actively managing your credit and using it in a responsible manner.

Be sure that you make your payments on time. Never skip a payment. Consider setting up automatic payments for your credit accounts. Late and skipped payments, even a single incident, can knock your credit score into the basement.

On a brighter note, the new scoring formula will be less punishing to those who had just a single serious credit problem, such as repossession, provided that all their other active accounts remain in good standing. Multiple serious delinquencies (payments that are over ninety days late) will still seriously hurt one's credit score. Remember the formula is looking for evidence that you can use credit in a responsible manner.

Try to use only thirty percent of your available credit. Better yet, use just ten percent. This formula, like its predecessors, does not like consumers who are using all the credit available to them. Do not max out your cards or go over your limits.

Also resist the urge to close accounts. The amount of credit considered as used is based on the amount of available credit that you have; closing an account decreases the amount of credit that you are considered to have available, making your ratio of used credit to available credit higher. Remember you want to keep your percentage of used credit down to thirty or less.

This new formula will penalize you for having too many inactive accounts. It is looking for responsible use of one's credit, and a large number of inactive accounts can be a red flag that you are not doing so. One way to keep your oldest and largest credit cards active is to charge something to them each month; these are the accounts that help your credit score the most, so you want to keep them active. Remember that a company can choose to close an inactive account. Also consider paying your balances in full every month; it will save you money and keep your used credit percentage down.

This new formula is more sensitive to the different types of credit that one has. Credit comes in two forms: Revolving and Installment. Revolving credit is credit cards and store accounts; installment credit is house and auto loans. The new formula looks to see if you have both types of credit; it may be necessary to have both types of credit to obtain a high score with the new formula.

This new formula is less severe on those who are actively applying for new credit from multiple sources. The effect of "moderate amount" (which the formula creator declines to define) of credit inquires will no longer be as severe as with the previous formula. One should still consider not applying for more credit than one actually needs (excessive available credit will still cost you points); but one need not hesitate to open an account if one is considering getting another account elsewhere in the near future.

And finally, as always examine your credit reports at least once a year. Dispute any serious errors, such as accounts that are not yours. Also dispute any negative information that is more than seven years old (except for bankruptcies which can be disputed after ten years) to try to get it removed from your credit report.

Remember the new FICO 08 is looking for the same things as the older formula; it just weighs them differently. Timely payments, length of credit history, amount of one's debt, ratio of used to available credit are still important to one's credit score. Just like the previous formula, the key to building a good credit score is to use credit responsibly.