This is the perfect time to work on your game plan (link here). It's also the perfect time to fine-tune your credit score. Even though the credit markets aren't hopping right now, that doesn't mean you should sit idle. Take advantage of this down time to position yourself for the credit rebound that will eventually take place. It's a great time to get back to the basics. And it's a great time to pretty yourself up.
In order to get in tip-top shape, you must know how the FICO score is comprised.
The most important category is, not surprisingly, payment history. At 35%, it's a no-brainer that you better pay your bills on time. Not only does it help your score tremendously, it also helps you avoid the consequences of defaulting on your credit card agreement. A single missed payment can result in a sky-high interest rate. Pay your bills on time. It has never been more important to pay your bills on time. This is not the time to miss a payment. That's why I use a spread sheet (link here) to track my payments.
Next up is amounts owed (also known as utilization). If your utilization is high, get it DOWN. Work on paying your debt down without accruing new debt. Utilization accounts for 30% of your score. This is the single-easiest place to pick up credit-score points (link here). I consider this low-hanging fruit. If you want to get your score up, simply pay down your balances. People with good payment histories will see their biggest jumps when they pay down large balances. If your utilization is already low, keep it low. Do not -- during this credit climate -- start increasing your utilization. It's a recipe for adverse action. Enough said.
LENGTH OF CREDIT HISTORY
Length of credit history, meanwhile, accounts for 15% of your score. If you must open new accounts in this credit climate, be judicious. Open them sparingly. Length of credit history looks at your oldest account and it looks at the average age of your entire credit history. When you open new accounts, the average age of your history gets reduced. Indeed, my recent Equifax FICO score of 777 (link here) would have been higher if not for my relatively low average age. Although my oldest account is more than 19 years old (that's good for my score), my average age is just four years old (that's not good). New accounts during the past two years, have brought my score down. I can help myself by refraining from new applications. Given this credit climate, it doesn't make sense to run out and grab a bunch of new accounts. Work on this aspect of your score by sitting tight.
Speaking of new accounts, new credit is worth 10% of your FICO score. FICO looks at recent inquiries, time since most recent inquiry, number of recent accounts, proportion of recent accounts by type, and time since recent account opening by type of account. New accounts generate credit inquiries. Credit inquiries result in a lower score. Inquiries impact your score for twelve months -- even though the inquiry remains on your credit report for two years. If you're not applying for new cards right now, you'll help yourself out in this particular category.
Finally, the rest of your score (accounting for 10%) is comprised of account mix. A borrower with experience in a mix of credit types (installment, revolving, mortgage, retail credit cards, etc.) will likely do better in this category. That said, I wouldn't run out and grab an installment loan just for the sake of having a better mix. Most of us, over time, will grab these kinds of accounts. I'd let time take its course here. Plus, even if you did run out and apply for something, in an effort to get a better mix, FICO would ding your score for the new account. It's not worth the short-term hit to your score. In other words, let's not worry about getting too fine with this particular category. Eventually, most of us will have a nice mix of credit. Be patient.
Now that you know how FICO works, you can work on improving your score. To recap, most people will get the biggest bang for their buck by paying down balances. And it goes without saying that you should be paying your bills on time. Additionally, ease off the new accounts. New accounts generate new inquiries, which ding your score.
Have a plan (link here). My goal right now is to get my scores above 780. All three of my scores are currently between 765 and 780. By the way, I did not pull that 780 score out of a hat, either. I found a breakdown of FICO scores on Equifax's Web site a few weeks ago. By being at 780 or higher, I will be in the top 20% of all FICO scorers (link here). That's where I want to be. From Equifax.com:
During the credit crunch, I am doing all I can to look as pretty as possible. I'm keeping utilization down. I am not reducing my average age by running out and grabbing a bunch of new accounts. As a result, I am also not adding any new inquiries. And I am paying my bills on time (and in full).
This stuff is basic. I haven't written anything here that is provocative or Earth-shattering. Still, during this uncertain credit climate, you would do well to work your FICO score.
Your FICO score is one thing in this crazy credit climate that you truly do control.