In this article we will try to give you some handy information regarding Credit Cards and your FICO Credit Score. Once you have a negative credit history, it follows you around and makes life very difficult for you for the following 7 years. If you have declared bankruptcy it is even worse; you will not be able to get anything on credit for at least 10 years. Not paying your accounts will impact negatively on your ability to get credit cards and your FICO Credit Score will prevent you getting many other things that you may need credit for.
Firstly, let’s quantify what a FICO Credit Score is:
- FICO is an acronym for the Fair Isaac Corporation, which is the company that provides the model that financial institutions use to judge your creditworthiness.
- FICO is the most commonly used system, although there are other systems.
- It is a quantitative formulation of how creditworthy you are.
- It denotes how likely institutions feel you are able to repay debts.
- It is partially based on your credit history.
- Assets and liabilities are also taken into consideration for your FICO Score.
- It is depicted by the use of a number between 300 and 850 – higher is better.
- A low FICO score will adversely affect your ability to obtain Credit Cards and your FICO Credit Score will also affect your mortgage rate.
- A higher FICO Credit Score will get you better deals on any financial contracts.
Great, now we all know what FICO is and that is can affect our ability to get any kind of loan. If you want to apply for Credit Cards and your FICO Credit Score is very low, you are going to have a huge problem. Before you even apply, take a look at what your past history is regarding how much debt you currently have, the types of credit that you have used in the past, how many years you have been buying on credit for, what new credit you have incurred, and what your payment history looks like.
These are all factors that will affect your application for Credit Cards, and your FICO Credit Score is worked out according to those factors. Obviously the Fair Isaac Corporation is not about to divulge the exact formula that they use. We do, however, know that FICO uses a very simple mathematical equation which weighs the various factors in at different percentages:
- Payment History 35% – Whether you paid bills regularly and on time.
- Credit Utilisation Ratio 30% – How much use you are making of Credit Cards, and your FICO Credit Score. The ratio is very important.
- Length of Credit History 15% – If you have been using credit successfully and responsibly for years it is very positive.
- Types of Credit Utilised 10% – A variety of credit managed well is good.
- Recent applications for credit 10% – apply for too many Credit Cards, and your FICO Credit Score will drop.
- Self-checks and checks for employment purposes will not affect applications for Credit Cards, and your FICO Credit Score.
If you are worried that you may need to apply for Credit Cards, and your FICO Credit Score is not that great, go onto their website and buy a FICO score. If you get a score that is closer to the low score of 300 than to the high score of 850 you are not doing that well.
If you have got yourself into a bit of a bind with late payments, don’t worry too much, all is not lost. There are ways that you can improve your credit score before you apply for new cards:
- Pay more than the minimum monthly payment – minimum payments only pay off the interest. Financial institutions check how much debt you have and also how long it takes you to pay off your credit.
- Work out a payment plan – the worst thing you can do if you are in a financial bind is to ignore it Most financial institutions will be willing to negotiate a lower repayment until you get on your feet again.
- Use debit instead of credit cards – debit card payments are not factored in, so will not affect applications for Credit Cards, and your FICO Credit Score will get higher.
- Take a pair of scissors to your Store Credit Cards – in-house credit cards are great, but they are too easy to use and too many cards will lower your FICO score.
- Check your credit report thoroughly – it is imperative that you do this, as you may already have settled an account which is still showing as outstanding. There may also be an account that is not paid due to very legitimate reasons. Contact the credit agency and ensure that they make a note of this immediately.
- Do not use your credit cards for small items – using your credit card to buy a packet of cigarettes and a Coke is not a good idea. Rather use a debit card or cash for day-to-day purchases.
- Reject Cash Advances – those unsolicited cheques that arrive in the mail from credit card companies are difficult to resist, but they are lethal Remember they are not bonuses but advances that must be paid back.
- Do not settle medical bills with credit cards – this may seem tough to do when you are in a bind, but paying medical bills with a credit card is not smart Rather come to some arrangement with the medical institution regarding paying the bill off in instalments.
The bottom line is that a low FICO rating is not the end of the world, so you need not feel that all is lost. The most important factor is that you DO something about a bad credit rating, as ignoring it will not make it go away, and may actually even make it worse.
Credit Cards, and your FICO Credit Score should never be allowed to run or ruin your life Take control and let your credit cards work for you, don’t work for them You will be surprised how easy it actually is to use your credit card responsibly. Remember that all your credit is affected by your FICO score, not just credit cards. A bad rating could affect any potential employment and also important purchases like motor vehicles and mortgages.