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Understanding Fico Scores Will Help You Fix Your Credit Rating

By Michael Redbourn

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Published: 28May2009
Word count: 988
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The number of Americans with either deteriorating credit ratings or destroyed ones is sadly skyrocketing, and the bad news is that the situation is not likely to improve for at least several more months.

There is a chink of light at the end of the present economic black hole though, and that ray of light is already causing many people to consider credit repair, and there is some good news for them.

If you're really determined to start fixing your FICO score (Fair Isaac Corporation), then the good news is that the thing that will most quickly cause an upward tick in your rating is arguably the easiest thing to implement.

Credit rating agencies keep a record of you debt to credit ratio, and viewed through their eyes it would look something like this.

50% or more is considered high-risk. 43%-49% is borderline and signifies likely financial trouble. 37%-42% means that the person needs to reduce their debts. 36% or less and you're looking really good.

So how do you find out what your debt to credit ratio is?

Easily, because credit reports from the three leading credit rating agencies Experian, TransUnion, and Equifax now include it.

If you'd like to get a quick idea of what yours probably looks like then the way that it's arrived at is as follows.

You have for example, a balance of $3,500 on a credit card with a $9,000 credit limit then the calculation is as follows, $3,500 divided by 9,000 and multiplied by 100 = 38.88%

However, since you most likely have several credit cards, along with other debts, you'd have to apply the above formula to all of them, so I'd suggest just waiting for your credit reports to arrive, because in order to improve your credit rating you're going to need them anyway.

Before we move on to actually looking at how to repair your credit rating, it might be worth noting that the credit agencies also consider a person's debt-to-income ratio, and the formula they use for that is;

(MDP) Monthly Debt Payments = $ 1000 (credit cards, car loan, personal loan) (MTHI) Monthly Take-Home Income = $3,500 (employment income) $1000 divided by $3,500 multiplied by 100 = 28.57%

Higher than 35% is high risk. 21% - 35% is risky. 10% - 20% and you're probably good for future credit. 10% or less and every lender will welcome you with open arms.

OK, if you haven't got current copies of your credit reports from TransUnion, Equifax and Experian in front of you then tut tut, because you should already be checking them on a regular basis, if for no other reason than that, difficult as it might be to believe, a full 1/3 of them not only contain errors, but they're often serious ones to boot.

Whether or not you have your credit reports, they will be almost useless they contain your 'credit scores', so if they don't contain them then please ask for another copy that does includes them, and you shouldn't be charged a second time.

Now check your FICO score because what you do next will depend on what you see there.

If you see the number ..

700 or higher then stop reading and take a long and well deserved vacation.

680 to 699 - you're loved and you won't be ripped off if you want a loan.

620 to 679 - you're a good guy or gal, but you'll pay high interest if you want to borrow.

580 to 619 - The banks and lenders are crazy about you, and they want to hear from you right away!

Yes, you read that right!

You're not yet in really serious trouble so they will lend you money and charge you a huge amount of interest and lots of commission too.

500 to 579 - You smell bad! You'll get a loan, but will get crucified!

Most people reading this will most likely get the above score, and the bad and the good news is that you should apply for a loan.

You'll get screwed but if you pay it back on time, then you're credit rating will improve by leaps and bounds.

499 and below ..

This is the worst news, and we need to fix your credit rating right away, because nobody will lend or rent you anything.

The good news is that it's not so difficult and you can do it!

Not so difficult?

Just do the following ?

1) Check your credit report and if you find errors then dispute them, and don't forget to include any documents that prove the error. Send your letter and documents by registered mail and be aware that the corrections to your report won't cost you anything.

2) If you have retail credit cards from companies like JC Penny, Sears and Lowe's etc. then try to get rid of them in any way that you can because they damage your credit rating far more than Visa and Master Card do.

3) Contact all of the companies that you owe money to that have restricted an account, and tell them that you're going to start paying down your balance. Reduce the amount that you owe them by as much as possible each month and remember that consistency and not speed is important; so do it at a pace that is comfortable and maintainable.

4) After you've reduced the amount for a few months, even by a little, contact them and ask if you can have your account reactivated. If they say "yes", then you're already on the home stretch because this will affect your credit rating more than anything else!

5) After you feel that your credit score has improved somewhat, please check your credit rating online before applying for any new loans, and tell the proposed lender right upfront, "this is my present credit rating", and ask, "Will I be approved?".

What you don't want appearing on your credit report at this point, is refused credit comments.

Hopefully what's written here will have helped you understand the credit rating system, and will also help you return your credit score to what it once was - or even, wasn't.

The author of this article was a top film sound editor for many years and he produced a film for Columbia at a very young age. He has a major interest and flare for economics, and one of his websites -> Free From Debts is for those that want to get free from debt quickly, and it has information on how to eliminate 90% of your debts by simply sending a one page letter.

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