Debt Management

How to Improve Your Credit Score Without Debt

No matter what feel-good commercials want you to believe, you are (usually) just a number to your potential creditors.

The number in question is called your FICO score, and it controls your financial life in ways you cannot imagine.

From Wikipedia:

A credit score is a numerical index which represents an estimate of an individual’s financial creditworthiness. It is based on a subset of the information in an individual’s credit report. Lenders, such as banks and credit card companies, use credit scores to determine credit limits and interest rates.

The best-known credit score in the United States is the FICO score calculated using mathematical formulae developed by the Fair Isaac Corporation. The three major American credit-report agencies (Equifax, Experian and Trans Union) all use variations on this scoring formula under different names, the best-known of which are the Beacon score and the Emperica score.

While your credit report is very important to your financial success, many lenders no longer even look at it, relying instead on the FICO score. In some ways it may seem unfair that a lender just checks whether your number is high enough and accepts or rejects you accordingly, but at least it is impartial and you may need financial management.

According to Wikipedia, this is the breakdown of your FICO score:

  • 35% punctuality of payment in the past
  • 30% capacity used, i.e., ratio of current revolving debt (e.g. credit card balances) to total available revolving credit (e.g. credit limits)
  • 15% length of credit history
  • 10% types of credits used (installment, revolving)
  • 10% amounts of credits applied for in the recent past

The nice thing about the breakdown is it makes it easy to see how to improve your score; first make sure your always make your payments in a punctual manner. You should know that credit reports do not track payments that are less than 30 days late, so you do have a bit of leeway. You should really avoid going over 30 days and you should NEVER go over 60 days.

The capacity section can be nasty. Even if you never make a late payment this can still bite you. If you can get a normal loan to replace a credit card balance it can really help your score because you cannot run up a conventional loan and run for other country as you could with a credit card.

The length of credit history section is pretty straightforward: the longer you have a good history the more trustworthy you become to creditors.

The installment vs. revolving section comes back to the same concept as the capacity section: revolving credit is more dangerous to creditor because it can be maxed out in times of trouble or when on the run from the law (remember folks, if you find yourself on the run from the law do not use your credit cards, you can be traced. Instead just draw cash from the cards at a bunch of ATMs and ditch the cards). Installment credit is predictable, and lenders love predictability.

Credit Score

How do you find out what your FICO score is?

Both Equifax and Trans Union, the two credit reporting agencies in Canada, offer FICO score information online. Trans Union is particularly nice in that they offer a quarterly score tracking offering for only a few dollars more than a single report.

In both cases you can receive an online credit report and FICO score for a fee. While both agencies are required to provide your credit report for free by mail, the FICO score does not fall under the same requirement. If you want to know your score, you will have to pay.

Is it worth the ~$22 to know your credit history and FICO score? I say ABSOLUTELY! Not knowing your credit score and history leaves you at a serious disadvantage, and without checking your credit history you may be leaving errors on your credit profile to your detriment.

Improve Your Credit Score

On three different occasions I found found erroneous information on my credit report, one time including a false report that an account had been sent to collections! Even if you don’t want to spend the money, visit the sites, print the application form, and mail in a request to get your credit report.

I’ll be covering credit reports in a future post, but for now just realize that most lenders look at your FICO score to determine whether or not to lend to you. To keep your score up pay your bills on time, avoid having high balances on your revolving credit, don’t have too much revolving credit, and build up a good history. Avoid applying for credit too much or too often (this includes applying for things like cellular and satellite TV in some cases).

If your score is low, get on track with your payments, cancel unneeded revolving credit, and play the waiting game: eventually all negative information falls off your record, but it takes several years.

A topnotch Hong Kong based financial planning firm Midway Management offers financial management, brokerage services and Foreign Investment Advisory Services. You can maintain your excellent credit score by having Midway Management services.

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