Improving Credit Score: How to Improve Credit Score Fast

Credit scores are the basis for a number of transactions in the business world. For a long time, the credit scoring model that was pioneered by Fair Issac Corporation (FICO) was the basis for calculating credit scores; so much so that credit scores came to be known as FICO scores. VantageScore, that emerged as the main competitor to FICO scores in early 2006, is useful for assessing people who use credit sparingly. This scoring model was developed by the credit bureaus, viz. Experian, Equifax and TransUnion and as per this model, credit scores range between 501 and 990.

The factors that contribute to FICO score calculations are: payment history, credit utilization, length of the credit history, new applications for credit and types of credit available. FICO 08 is the latest credit scoring model that uses the same factors that were used by the by old FICO scoring model. FICO 08 and FICO scores range between 300 and 850.

Benefits of Improving Credit Scores

Having a credit score that lies at the higher end of the credit score range results in a number of benefits to the consumer.

Favorable Loan Terms: People with credit scores in the higher end of the credit score range can hope to avail a loan that requires a low down payment and a low monthly payment on the borrowed sum. The latter is on account of the favorable rate of interest on the loan. Moreover, the repayment period for the borrowed sum is also longer as compared to the duration of the loan for people with bad credit.

Affordable Insurance: People, who are interested in obtaining auto insurance or homeowners insurance, have a better chance of being covered at a lower premium if they have good credit scores. This is because actuaries have noted a negative correlation between credit scores and insurance claims.

Proof of Good Management Faculties: A number of landlords and prospective employers prefer to look at the tenants' or the candidates' credit report before concluding the transaction or hiring the interviewee respectively. This is because the applicants' credit report bear testament to their financial management prowess.

How to Improve Credit Score Fast?

Typically, factors that are used to assess creditworthiness do not vary greatly between credit scoring models. Hence, the following tips for improving credit scores will be useful regardless of the scoring model used.

Reducing the Use of Revolving Credit: Reducing the use of revolving credit, viz. credit cards and home equity lines of credit, is the first step towards improving credit scores. The best way of improving credit scores is by not carrying forward the monthly balance on the credit card and by discharging it punctually. People, who have used their credit card indiscriminately, can consider repaying dues by consolidating debt by procuring an unsecured loan. Although, the most convenient way of consolidating credit card debt is by transferring the balance on the cards to a card that has a low/zero introductory APR, the new credit card law that is expected to come into force on February 22, 2010 will make it difficult for people to procure the same. Once the new law comes into force, consumers may be forced to opt for a low interest rate loan for the sake of consolidation. However, availing installment credit or any non-revolving line of credit like home equity loan (HEL) for the purpose of discharging credit card obligations is believed to impact the credit score less negatively. Thus, the new law may help consumers by propelling them in the right direction.

Improving the Balance to Limit Ratio: Credit utilization ratio or the balance to limit ratio is calculated by using the following formula:

Credit Utilization Ratio = Outstanding Credit / Available Credit

In general, if the use of revolving and non-revolving credit is 50 percent or more of the available credit, the credit score of the consumer gets negatively impacted. Hence, a low credit utilization ratio is desirable. Thus, avoiding canceling credit cards, requesting an increase in the credit limit but using credit sparingly results in improving credit scores.

Avoiding Default: Defaulting on student loans, mortgages, auto loans or any other borrowed sum will result in the credit score of the consumer taking a hit. Bankruptcy and foreclosure should be avoided at all cost. Coming to the worst, people should try and repay debts by consolidation since voluntary repossession, in lieu of the defaulted sum, may still be reported to the credit bureaus.

Limiting Inquiries and Contesting Errors on the Credit Report: People, who are shopping around for loans, often forget that lenders may inquire about the borrower's credit worthiness and this may impact the credit report negatively. For credit scores calculated with the FICO 08 formula, all inquiries within a 45-day span are treated as a single inquiry. Lenders using the older version of the credit scoring formula treat all inquiries within a span of 14 days as a single inquiry.

For more on credit score improvement one may refer to the article, 'Ways to Improve Credit Scores'.

The length of the credit history is also important from the perspective of improving credit scores since it is positively correlated with credit scores. People, with a short credit history, should focus on building their credit history so that their credit score is a true indicator of their credit worthiness.