Knowing how to improve your FICO score is one of the most important factors in clearing up your credit.  A FICO score is a three digit number that determines the interest you will pay on your credit cards, home mortgage, and even determine whether you will get that new apartment. FICO, the Fair Isaac Corporation, single handedly created this three digit number that will soon become the dictator of your livelihood in more ways than you can name.  There are five elements of the FICO score. They are listed below along with their weight of importance.
1.    Record of paying bills on time…………………………………………………35%
2.    Total balance on your credit cards and other loans compared to your total credit limit……………………………………………………………………………..30%
3.    Length of credit history…………………………………..……………………15%
4.    New accounts and recent loan applications…………………………………….10%
5.    Mix of credit cards and loans………………………………………….………10%
Number One:  Always pay your bills on time.  There are no excuses for late payments.  As soon as I receive a bill, I pay it immediately.  It was a very difficult habit to establish, because instinct says to throw it on the dresser under a pile of other envelopes and avoid it like the plague.  Another bill paying strategy is to designate a day of the month where you do nothing but pay bills.  No matter what you are doing, stop and pay your bills.  The only downfall to this is that sometimes if you happen to miss that day, it leaves room for procrastination.  If the fixed monthly cycle is your preferred strategy, designating two days a month might be more appropriate.  Better still, just pay as they come.  It feels better and you don’t feel the stress of the buildup of unpaid bills on your dresser.
Number Two:  Your debt-to-credit-limit (D/C) ratio is an important issue as well.  Let’s just say you have a $3,000 balance and a total credit limit of $6,000.  Your D/C would be 50% ($3,000/$6,000).  This is an important number which accounts for a high percentage of your FICO score (30%).  Continuing with the above example, if you pay off a $1,000 balance on one of your cards (let’s call it Card A), with a credit limit of $2,500, I would advise you to NOT cancel Card A.  Here is why.  If you cancel Card A, your credit limit will decrease from $6,000 to $3,500 (remember you had a $2,500 limit on the card).  Since you just paid $1,000 of your total balance owed, your new balance owed decreased from $3,000 to $2,000.  Your new D/C ratio would now be 57% ($2,000/$3,500), which increased from 50%. The end result of your presumably responsible behavior of bill payment and debt reduction would be an increase in your debt-to-credit-limit ratio and a decrease in your FICO score.  The best move when paying off the credit card balance would be to simply cut up your card, and leave the credit line open.  Don’t forget you have a line open especially if there is a yearly charge on the card.  There is no sense in wasting $50 to$70 a year on a card you will never use.
Number Three:  Your credit history is very important as well.  If you must cancel a card, make sure you cancel the newest ones first.  The Fair Isaac Corporation can use more points of data to determine your FICO score the longer your credit lines have been open.  Protect those cards you have with the longest history.  If you must cancel a card, cancel one card then wait a month.  At the end of the month, wait and see if your score was negatively affected.  If it wasn’t, do the same for each additional card you want to cancel.
Numbers Four and Five:  For 4 and 5, you just want to be careful not for apply for too many cards at once.  This sends a red flag to lenders.  Steer clear of too many retail cards as well.  When you are at the sales counter at Nordstrom’s, it can be very tempting to allow the check-out employee to coerce you into a savings card that will open the door to “extreme savings”.  In the book “The Millionaire Next Door”, the authors (Thomas J. Stanley and William D. Danko) mention the most popular credit cards of millionaires.  The top five credit cards of millionaire household members, and the percent of millionaires who own these cards, are:
1.    Visa (59%)
2.    MasterCard (56%)
3.    Sears (43%)
4.    Penny’s (30.4%)
5.    American Express Gold (28.6%)
Why you ask?  The truly wealthy realize the lack of need for these retail credit card traps.  They use cards responsibly and with caution so as not to accumulate unnecessary, overpriced debt.
Lenders like to see a good mix of installment loans along with your credit cards.  Installment loans, like your car and house, show just how reliable one can be, especially if payments have been made for an extended period of time, as well as in a timely fashion.
Cleaning Up Your Credit
If you want to clean up your credit reports for errors, it is not hard at all.  You first have to get your credit reports.  You can get them online at www.annualcreditreport.com or you can call 877-322-8228.  The three biggest bureaus are Equifax, Experian, and TransUnion.  You want to make sure you get all three since many lenders report to only certain bureaus.  If you get these three, you have the bases covered.  The cost is $9 per report.  In New York, as of September 1st, you will be able to get your report free.
Once you have your reports, you should call and challenge any error you see on it.  This usually takes awhile to complete the process.  The bureau has 30 days from the time they receive your report to investigate the challenge.  They will contact the company to verify that the information is correct.  Upon doing so, they will report back to you that the information either will stay on the report, or will be taken off.  If it is to stay on, and the information is not erroneous, it is up to you to deal with the company directly.  Back in December of 2004, there was legislation passed that made companies liable to respond quickly to all challenges with all pertinent information.   It seems they had a reputation for dragging their feet before (they aren’t much faster nowadays either).
There is a possibility that if you see errors on your credit report, you have been a victim of identity theft.  Below, I copied and pasted instructions from a Suze Orman website of what to do if you come across fraud.
Identify Theft (Suze Orman, 2004)

WHAT TO DO WHEN YOU ARE A VICTIM OF IDENTITY THEFT

1. Contact one of the three credit bureaus and ask that an extended fraud alert be put on your account. This will require all creditors to contact you directly before granting any new credit in your name. The bureau you contact will share this information with the two other bureaus. The fraud divisions can be reached at:
EQUIFAX: 800-525-6285

EXPERIAN: 888-397-3742

TRANSUNION: 800-680-7289
2. Contact your local police department and ask to file a criminal complaint. Some police departments aren’t too thrilled to do this, since it is a very difficult case to pursue. But be persistent; simply having the complaint document is going to help you deal with cleaning up your reputation with creditors.

3. Complete the Federal Trade Commission’s ID Fraud Affidavit and submit it to all creditors where you have an ID Theft dispute.

Your credit score is your ticket to many things in your life.  Whether or not you can buy a house, the level of your interest rate on your house which controls your mortgage payments, your car payments, your ability to get business loans, whether you get that new job, and even the amount of insurance coverage you can get can all be negatively affected by a low FICO score and bad credit.  Start today and get your credit in order.

Written By: Ryan C. Mack, President of Optimum Capital Management, LLC
For Questions and Comments Call 718-623-3423 or Email info@optimum-capital.com