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Mark Cappel
UpdatedFeb 12, 2010
Key Takeaways:
  • Review how your FICO score is calculated.
  • Examine ways to raise your score.
  • Understand that the different credit bureuas are likely to show different scores.

My spouse and I are buying a house. His credit score is low. How does a FICO score work, and how do we improve his score?

My husband and I are trying to purchase a brand new home with the USDA program. They want my husband's score to be at least 640 but when they pulled it up it was at 545. When i pulled it up it was at 572. There was only 5 things against his credit which was child support which wasn't removed due to everything paid in full we had to file a dispute with and i went ahead and paid off the other three smalls bills that were on the credit report. We are trying to raise the score fast and i was wondering since i went ahead and paid off the 3 and the other one after dispute will get taken off report which was biggest (except for car loan in 04) almost $4,000 child support. Will it hurt us even after paying it off showing as a most recent activity to account or at least give us some extra points on his FICO?!? We really want to get the process started ASAP. Please help explain this to me.

It is always better to resolve debt, even if the resolution causes recent activity on an account, than to debts unpaid.

As you are inquiring about how to improve your credit score, also called a FICO score, let me give you some information on how a credit score is calculated. Your credit rating is calculated based on several variables, including:

Payment history

Payment history counts for approximately 35% of your score and is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

Total debt and total available credit

This counts for about 30% and weighs how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score.

The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.

Length of positive credit history

This counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments. If you have accounts with long history (5 or more years) and no missed payments, you should keep these open and paid off.

Mix of types of credit

This counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

The number of new credit applications you have recently completed

This accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

How to improve a credit score

Here are four steps to improve your credit score:

1. Pay off all debts and keep revolving lines below 25% utilization. Do not "max out" any loans or cards.

2. Diversify you credit portfolio. If, for example, you have only a Visa, MasterCard, or Discover card, get a department store credit card or card from a gasoline retailer. Make your payments every month. Leave a small balance every once in a while to show that you are able to handle debt on more than one account.

3. Keep your oldest credit account active. Remember "Length of positive credit history" discussed above.

4. Pull your credit report and contest any inaccurate information so that it can be corrected by the credit bureaus. Go to the debt self-help center for sample dispute letters. The credit bureaus must follow the rules set forth by Congress in the Fair Credit Reporting Act (FCRA).

FICO score at a glance

FICO is short for Fair Isaac Corp. Founded in 1956, the Fair Isaac Corporation is the financial institution that developed the FICO credit score. This credit rating is used to measure your credit risk. FICO scores can be obtained through most major consumer reporting agencies in the U.S. Whenever you make a purchase that involves your credit (such as a car, home, boat, etc.), creditors obtain your FICO score; however, your score is not released to you.

You can find out your FICO score on your own, but the creditors you partner with to finance personal belongs don't have to provide you with the financial information they find out about you. However, if you're turned down for financing, creditors and lenders are required to provide you with a reason why you were turned down and, if your credit score was a factor, your credit score. They are also required to specify which credit agency they used to establish your credit score. To learn more, see the resource All About Your FICO Score.

Keep in mind that there is more than one credit score. In fact, there is more than one FICO score. Fair Isaac offers different versions of its FICO software that generates slightly different results based on the same inputs. Also, lenders may use a competitor to Fair Isaac's software that generates a similar-looking number, but is based on a different mathematical model.

If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by the credit information page.

I hope this information helps you Find. Learn & Save.




BBill, Feb, 2010
Under the FDCPA, the debt can appear 7½ years from the date of first delinquency. That date cannot be reset by a collection agent or anyone else, for that matter, under law. That date will not be reset if you settle the debt. That date will not be reset if you do nothing. That date may not be reset if Collection Agent A sells you account to Collection Agent B.

If any information on your credit report is inaccurate, then it must be deleted. Lexington Law challenges the derogatory entries on your credit score. If the creditor that posted the information in question fails to respond to the challenge then the credit reporting agencies must delete the entry. Generally speaking, Lexington's services are effective according to readers who have contacted me. However, no firm like Lexington can guarantee 100% effectiveness for all consumers, because not all consumer circumstances are the same.
SSally Ramos, Feb, 2010
How long after paying off a debt that has gone to collections and is showing on your credit report deleted? I know it will show for 7 years, is there a way that it can be deleted. I just retained Lexington Law Firm. I'm hoping that they can help me.