Few things are quite as important in the business-and-investing world as access to capital. Unless you have piles of cash in the bank, you are likely going to need access to credit to fund your deals. This is where a few points on your credit score can make a significant difference. Luckily, there are several things you can do to give your score a bump when it comes time for financing.
1. Know Your Score And Goal
I will not spend a lot of time here, because this should be a given. I personally think everyone should monitor their FICO score. (Not Credit Karma. More on this is another post). You also need to have an idea of what score you need to get the financing you want. A good relationship with your bank, mortgage broker, or other lender comes in handy here. Ask what the parameters are for different programs.
2. Mix of Credit
This is going to sound unfair, but having your car and house paid off may be hurting you. Some people actually take out small loans and stretch them out over years just to keep an installment loan reporting on their credit report. This is also true for people who have no revolving credit (like credit cards or lines of credit). Your mix of credit accounts for 30 percent of your credit score. You need to have an installment loan and revolving credit accounts to maximize your credit score.
3. Credit Utilization
This is the most significant thing you can do to quickly improve your credit score. The short and sweet of it is to keep your revolving credit utilization as low as possible —absolutely more than 0 percent and less than 8.99 percent. Many believe there are tiers in FICO’s scoring system at 10 percent, 30 percent, 50 percent and 90 percent. At 90 percent, you are considered maxed out and face the most point loss. Every credit score is different, but most show a point gain for each tier of utilization reduction. I personally have continued to see drastic point gain even below the 8.99 percent for each percentage rate reduced. Just remember, FICO rounds up, so you need to target less than 8.99 percent, 28.99 percent, 48.99 percent and 88.99 percent. This applies mostly to overall utilization,, but small point variations may also be attributed to individual card use. If one card reports at 95 percent, you will likely see a point dip, even if overall utilization is still under 90 percent.
4. Zero is Not Always Better
Again, this may seem unfair, but paying all your credit cards to 0 percent utilization will actually cause a drop in your credit score. You are penalized for not having revolving credit, and you are penalized if it looks like you are not utilizing the credit you have available. On old FICO models, you may be penalized for carrying a balance on too many cards. For the best results, show a small balance on at least one credit card, but no more than 1/3 of the cards you have. This means, if you have six cards, you can show a balance on 2 of them.
5. Three to Five Credit Cards
Many believe that for optimal scoring, you should have three credit cards or credit lines. You also may get a bump for having five cards, but only after having them for at least two years. You do not get further bumps in score for more accounts over five, however. This gets farther into the speculation of the FICO scoring model, because no one knows exactly how everything is scored. However, this is common belief among experts.
Just remember, you do not have to scrutinize all of these factors all the time. You can generally keep an eye on your credit score and put these in place two or three months before looking for financing. It is also important to note, the old FICO models are used for mortgage scores most often, instead of FICO 8. There are also other types of specialty FICO scoring, such as for auto loans. This is why it is important to know your lender, which bureau they pull, and which FICO model they use.
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