In today’s world there are many words that we all consider and
recognize as curses. Somewhere in that mix, our economy has added a
few others; we now have our Sallie Mae’s, Fannie Mae’s, student loans,
ARMs (Adjustable Rate Mortgages), recession, depression, bankruptcy
and foreclosure. There’s another word that’s been making its way to
the top of the list and its our dear friend Fair Isaacs or F.I.C.O. as
some of you may know him.
For those who are not familiar, F.I.C.O. is a credit reporting system
started by the Fair Isaacs Corporation. It is a numerical measurement
of your credit worthiness that ranges from 300 to 850. Your F.I.C.O.
score is used by most lenders to determine whether or not you can
obtain credit so using it the wrong way can definitely feel like a
curse. In fact because of lack of financial education and our current
economic state, most of you reading this now may feel like F.I.C.O.
has done nothing but hinder you.
Your score can stop your from getting loans, renting or buying a home,
purchasing a car, opening a bank account or even getting a job.
Getting a handle on your F.I.C.O. score is easy if you educate
yourself on how F.I.C.O. is calculated then discipline yourself. The
five categories that is used to calculate your score are: How much
debt you have, Your payment history, Your debt usage ratio (How much
you owe in relation to your credit limit), How far back your credit
history goes and your mix of various types of credit.
In order to get your credit back on track and keep it that way, there
are five things you must avoid:
1) Making late payments
Obviously we should know why this is a big no no but just in case
here’s why — Credit is given based on your ability to pay back your
obligations on time. making late payments simply shows creditors that
you are having a hard time meeting your obligations. late payments
stay on your credit report for seven years so its imperative that you
avoid them at all cost. if you’ve made some late payments in the past
its not the end of the world. As you continue to make payments on time
the late payments will have less of a negative impact. the key is
discipline and showing creditors you are responsible.
2) Carrying big balances
Most people don’t realize this but creditors usually extend credit to
those who they don’t think need it with the hopes that they’ll use it
eventually. Carrying a big balance show creditors that you are having
issues and are relying too heavily on the credit to get you by. This
has a negative effect on your credit score as well as your ability to
obtain new credit. As a rule of thumb you should keep your usage down
to about 20 percent ie: if your credit card limit is $1,000; you
should not carry a balance greater than $200
3) Closing a Credit line
Closing a credit line can hurt you in two ways; First as I stated just
a few moments ago you want to keep your usage down to 20%. Closing a
credit line increases your usage because you no longer have that
credit limit available to you. It can also effect you because you may
be getting rid of a rich part of your credit history. If you have a
card that’s been open for a while and you’ve been making payments on
time it is best to keep that line open. Most people close credit lines
because they may have received a new line with a better rate and don’t
want to have too much credit outstanding or might be trying to avoid
an inactivity fee if they’re not using the card. Keep in mind that you
lose more by closing your old lines. Best thing to do is to call your
current credit line provider to negotiate a lower rate or fees.
4) Having too many credit inquires
Anytime a creditor checks your credit it effects your F.I.C.O. score
by 5-15 points. The deduction in points may only last for about six
months but it is still important to use caution. Be extra careful when
financing a car. Car dealers usually run your credit with multiple
banks in an attempt to qualify you and get you the lowest rate. While
this may seem like a noble cause this has an adverse effect on your
credit and can cause serious damage. Keep in mind that you can check
your credit as much as you want yourself without any effect to your
credit score. With that in mind I suggest that you know your score
whenever going anywhere to obtain credit and inform your potential
creditor of your score prior to applying to anything.
Defaulting on any type of loan or credit card is the single worst
thing you can do to your credit. Defaulting will surely get you
declined for any new loans and should be avoided at all cost! If you
ever foresee that you can’t meet some or all of your obligations it is
imperative that you reach out to your creditors as soon as possible.
Most will be willing to work with you.
All in all F.I.C.O. can be your friend if you treat him right. Treat
him wrong and he will become your worst nightmare.
Ash’Cash is a Business Consultant, Motivational Speaker, Financial
Expert and the author of Mind Right, Money Right: 10 Laws of Financial
Freedom. For more information, please visit his website,