Your credit score is a three digit number that potentially has six digit impact in your financial life. Lenders often determine whether or not to give you a loan or credit card and at what interest rate based on this number alone. Most lenders use what is known as the FICO score.
Your FICO score is a number between 300 and 850. Needless to say, the higher the number the better and easier it is to obtain credit. Without going to deeply into FICO score ranges (which differ by lender anyway), a score of 700 is considered good. But to get thumbs up from even the most discerning lender, you need at least 720.
In order to improve FICO score, it is helpful to have a basic understanding of how this all-important number is reached. Here is the basic scoring model:
1. 35% of your score is determined by your payment history. This is the biggest chunk of the score for one obvious reason; they want you to pay your bills on time.
2. 30% of your score is determined by your balance to limit ratio, also called utilization ratio. This means the total balance of debts you owe in proportion to the total credit available to you. A utilization ratio of 30% or less is considered healthy.
3. The length of time you've had credit, or also known as credit history. Needless to say, the longer your history the better. This accounts for 10% of your FICO score.
4. Variety of accounts: A "healthy mix" is what to go for. Your score will be lower if you have only one type such as credit cards and higher if you have a credit card, a car payment, a student loan and / or mortgage. This accounts for 10% of your score.
5. Your new credit accounts for 10% of your score. Too many new accounts can represent greater risk.
Based on the above, there are only two ways with which you can improve your FICO score fast;
1. Negotiate with your creditors for removal of negative information from your credit report. Often original creditors will not do this, but collectors might in exchange for full or even partial payment. This is a subject for which books have been written.
2. Get a limit raise or pay down your debt to 30% of limit or less. This can cause jump in your score in a very short time. Of course, if you're already having problems paying your bills or have a low credit score this might not be an easy option. So what can you do?
One solution for lowering your utilization ratio is to get a merchandize credit card. These are cards for which you can only use to purchase items from the issuing merchant. They often come with relatively high limits, which is exactly what you need. But beware; there are many scam "merchant cards" out there.