Your credit score is not a report card meant to grade you on your past payment history. Are you surprised to hear this? If you are in a credit repair program and are hoping for truly meaningful progress you should understand the true intent of the FICO scoring model; you must learn to think like the engineers that developed the algorithm.
Measuring Risk of Default
The FICO credit score is designed to measure the likelihood that you will default on your obligations. There are many subtle factors that FICO considers in its calculation. Each of these factors is utilized as a predictor of future behavior. Some of these factors make perfect sense, but others, less logical, are likely to take you by surprise and hinder your credit repair progress, so don’t let them catch you unawares.
When you apply for a new credit card, auto loan, or any new debt your credit scores will dip slightly. The reason that FICO lowers your scores for each inquiry is that it sees your shopping as a potential threat to your budget. Each inquiry will impact your scores by between 1 and 5 points depending on the extensiveness of your credit. The more established your credit the less impact an inquiry will have because you have demonstrated skill in opening and managing new accounts.
New accounts will put a significant, but temporary, dent in your credit repair progress. The reason is simple; FICO recognizes the new account as a threat to your budget. The impact on your credit repair progress will fade quickly as your demonstrate the ability to manage the new debt responsibly. And, as with inquiries, the impact of a new account will depend on the extensiveness of your credit. The more established your credit the less of an impact on your scores.
Revolving Balances and Credit Repair
Revolving balances are a big factor in any credit repair program. If you want to improve your scores you must reduce your balances. Buy why is this? The FICO engineers are aware that high revolving balances are likely to occur when money is tight. Conversely low balances occur when money is plentiful. FICO sees a tight budget as a forerunner of potential default and will lower your scores to warn potential lenders that it may not be the right time to lend you money.
Consumer debt is a contentious issue among those who are caught unawares by this little wrinkle in the credit scoring formula. FICO carries an automatic bias against this type of debt regardless of any of the potential benefits that may be built-in. Consumer debt includes store cards and store financing most commonly used for the purchase of furniture and electronics. This type of debt is usually pricey and frequently comes with no-payment deals that mature into precarious repayment plans after a fixed term. If you are in a credit repair program you should avoid this type of debt.
Active vs. Inactive Accounts
You know that it is important to keep your credit card balances low to optimize your credit repair results. But did you know that if you pay those cards off and let them sit unused the credit score value of that account will start to fade away? FICO recognizes that many credit cards get retired, both by consumers and creditors, and yet continue to report. Logically, an inactive card should not count towards your credit worthiness if it is not currently in use.
If you would like your credit scores to reach their full potential and you don’t feel up to the task of evaluating every possible option, just contact a credit repair professional. You don’t have to manage the job alone. A credit repair professional will be happy examine your credit reports and identify all of the opportunities to boost your score. Good luck!
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