Credit Repair Alternative: Credit Report Education & Action Plan

Imagine your car’s engine has exploded or your mother-in-law and her six cats just moved into your two-bedroom house.

You need money to buy a new car or bigger house.

You go to the bank and the loan officer does some research. You hold your breath as he or she gets to the one secretive number that will decide it all. It’s not your age, your weight or your IQ.

It’s your bad FICO score.

When Your FICO Score Is Bad

FI-what? FICO, or Fair Isaac Corporation, the nation’s oldest and most trusted provider of credit scores.

FICO scores are the three digits that tell lenders how likely you are to pay back the loan on time. Unlike your weight or age, the higher the number, the happier you’ll be.

You can increase your score with a few steps. They are simple though not necessarily easy. If that prospect bothers you, blame William Fair and Earl Isaac. They were the mathematical engineers who devised the first credit-monitoring system in 1956.

Fair, Isaac and Company was eventually shortened to FICO, and it is the go-to information source for the three major credit-reporting agencies: Equifax, Experian and TransUnion. The three agencies’ evaluation methods differ slightly, but the final numbers consistently reflect your credit-worthiness.

The FICO scale runs from 300 to 850. Anything above 750 is excellent. The average score is 695. Anything below a 600 credit score means you’re likely to be living with your mother-in-law and her cats for a while.

It’s all based on algorithms only pointy-headed professors like Fair and Isaac would truly comprehend, but here’s all you really need to know: Your age, race, religion, sex, marital status, address, income and employment history have no bearing.

Lenders will factor some of those in when deciding whether to give you a loan and other scoring systems may use that info, especially income and employment history, to calculate their scores, but FICO’s algorithms don’t care.

Only credit-related matters are considered. Your credit card history, mortgages and public records like bankruptcies, foreclosures, wage attachments and liens. Their importance diminishes over time, but bankruptcies stay on your score for 7-10 years.

FICO bases scores on five categories with varying percentages of importance:

Payment History – 35%

Payment history accounts for thirty-five percent of your score. Whether you’ve paid your credit account on time. Having no late payments doesn’t mean you’ll get a perfect score, however, since 60-65 percent of credit reports show no late payments, that would be considered a very good thing.

Amounts Owed – 30 %

That includes the total figure you owe and what percentage of your credit limit you use. For instance, if you have $7,200 on a Visa card with a $10,000 limit, your “credit utilization” is 72%. Experts suggest you limit credit utilization to under 30 percent, which in this case would be $3,000. Having high balances shows you might be overextended

Length of Credit History – 15 %

The longer you’ve used credit, the better.

Credit Mix – 10 %

The combination of credit cards, installment loans, mortgages and other credit payments. As long as you make on-time payments, the more types of credit you have, the better.

New Credit – 10 %

Everybody has to start somewhere, but opening a number of new accounts in a short period is a red flag. In other words, don’t apply for more than one or two credit cards at a time and make sure you keep your oldest credit cards open even if you don’t use them often as the average length of time you have had your credit cards matters.

The percentages in each category are not set in stone. For instance, length of credit history will count less for newer consumers than longtime credit users.

If you don’t think your score matters, think again. A good one not only means you’ll get a loan quicker and easier, it often means lower interest rates.

Say you apply for $200,000 fixed-rate, 30-year mortgage. If your credit score is 760 or above, you’d get a 3.48 interest rate (based on January, 2016 rates). If your credit score is 620 to 639, the rate would be 5.07.

In real money that means your monthly payment would be $895 with a good credit score and $1,082 with a bad credit score.

So how do you improve your scores?

  • Monitor your credit report to make sure there are no inaccuracies that could bring down your score. You can request a free copy of your report at
  • Dispute debts with creditors, bill collectors and reporting agencies if they are in error.
  • Pay your bills on time. If you’ve missed payments, catch up. If need be, set up automated reminders when payments are due. Or set up automatic payments from your bank account.
  • Reduce your debt. Pay your credit cards in full if possible, and try to keep your credit utilization at no more than 30 %.
  • Don’t just move debt around. Don’t pay off one credit card with another card. Opening multiple accounts in a short period of time is also a negative.
  • If you have overdue bills, bargain with the creditor to see if it will accept partial payments. If it does, have the creditor report the account as “paid as agreed.”
  • Get help. If you’d like to take these steps but don’t see how you can swing it, call a non-profit credit counseling agency and ask for help coming up with a viable plan.

With work, you can improve your credit score and make yourself much more enticing to lenders.

That beats sitting around with a bunch of house-crashing cats.