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Credit Repair And The Zen Of FICO

May 5, 2008
What Do You Want?

How serious are you about credit repair? Some people are happy to improve their credit, others are not satisfied until they master their credit scores. If you are aspiring for credit repair perfection, then you are ready for a lesson in the Zen of FICO.

Credit Repair Matters

Your credit score is just a number, and yet it can have a huge impact on your life. And in the wake of the credit-meltdown of 2007 creditors have tightened their guidelines and will now make sure you pay dearly for any deficiency in your credit score. Credit repair has never been more important.

Looking For Credit Repair Enlightenment

Do you want to master your credit scores? Are you ready for the Zen of FICO? If so, you will need to explore the deeper truths of credit repair - to understand the meaning behind the numbers. You need to enter into the mind of the creators; you need to know what Fair, Isaac and Company is trying to do.

A Bit of Background

Lenders base their underwriting decisions on credit scores they purchase from the three credit bureaus. The bureaus all use a scoring model called the FICO score. FICO is an acronym for Fair Isaac and Company, the developer of the score. Each bureau has re-branded the FICO score for marketing so you may hear it called by different names, but the formula is the same.

Why the Scores are Different?

You may notice that your three credit scores are different. This is because each credit bureau receives information from a slightly different mix of creditors. If you were to examine your three reports you will see that some accounts are missing on each bureau. Timing is also a factor; a recent change in your credit may be reported at one bureau before the others.

A Method to Their Madness

The FICO model is designed to measure the likelihood that you will meet your obligations. The purchasers of credit scores make money by lending you money. Their earnings come from interest you pay, along with any fees they charge. These creditors may measure your qualifications in other ways, but your credit score is the final criteria.

Be the Score, Grasshopper

To master the art of credit repair means to grasp the connection between your life and your credit scores. You need to understand that you are communicating information about your credit worthiness every day of your life. You provide the data that will determine your credit scores every time you make a payment, apply for credit, or open or close an account. What messages are you sending today? Let's take a look at the behaviors that influence your scores. As we explore the components of credit scoring you will find an intuitive understanding arising; you will begin to make sense of the way FICO interprets your behavior.

Making Your Payments

Your payment history is a big component. Every time you make a payment you are telling the FICO model that you are responsible. You need to communicate this fact on a regular basis. If you don't have sufficient credit your credit repair effort will not succeed. Installment accounts are good, but there is nothing like well managed revolving debt to improve your scores. You should have at least three credit cards. And if you really want results you must keep them active.

Your Account Balances

Here is another category of information that can shed light on the mystery of credit repair and the Zen of FICO. Think about your revolving accounts again. What message are you sending to FICO if you run your balances up to the limit? You are telling FICO that you are irresponsible. This may not be the case, but Fair Isaac and Company figured out that people with maxed out cards are much more likely to default than people who restrain their spending. A maxed out credit card is credit repair suicide. Conversely, the lower the balances relative to your high credit limit the better you will score. Do you see the logic?

The Length of Your Credit History

Cleaning up your credit report is an essential part of credit repair, but don't close good accounts. FICO loves old accounts; the older the better. Old accounts indicate stability. Conversely, new accounts make FICO nervous. If you give in to the temptation to spend every penny of your new credit limit you may not be able to pay your bills. Again, that may not be the case, but statistically the evidence indicates increased risk. And measuring risk is what FICO is all about.

Those Darn Inquiries

We already know that FICO is not wild about new accounts. And where do those new accounts come from? From the FICO perspective, they come from credit inquiries. That's right, every time you have someone run your credit you are telling FICO that you are about to get into debt. New debt means new risk. And FICO is all about risk. So Zen up your credit repair efforts and make sure you communicate the right message. Let FICO know that it has nothing to worry about. The more clearly you convey this message the higher your score will be.
About the Author
Jim Kemish, a nationally recognized credit repair expert, is the president of Sky Blue Credit, a leading credit repair business since 1989. Jim is also the president of Power Mortgage, a Florida mortgage company.
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