We’re in the middle of a credit crunch, and getting an installment loan – whether it’s an auto loan, a home loan, or a personal loan – requires better credit than ever before. Creditors have their guards up and lending standards are becoming increasingly strict.

The most common credit-scoring model used by lenders is the FICO score. The FICO model (originally Fair Isaac) was established in 1956 by an engineer named Bill Fair and a mathematician named Earl Isaac. A FICO score can range from a very risky 200 to a perfect 900.

In a recent CNNMoney.com report, John Ulzheimer, president of consumer education at Credit.com, stated that FICO requirements are on the rise: “You need a 750 or better today to have the same treatment you got with a 700 two years ago,” he says. John D’Onofrio, CEO of Autoloandaily.com, concurred: “Two years ago a 680 was enough to get a great car loan rate. Today it’s often the minimum to qualify at all.”

How to maximize your FICO score

If you’re thinking of borrowing money (other than hard money loans like small payday loans or emergency cash loans that don’t require credit checks) you need to do everything you can to boost your FICO score before you apply. Here are some things you can do to maximize your credit score:

Find your score

You can get free estimates of your credit score at any number of websites (like Creditkarma.com). But if you’re serious about getting an installment loan on the best available terms, you need to see what your lender will see. Lenders will be looking at your actual FICO score, based on credit reports from three credit bureaus: Experian, Equifax, and TransUnion. To get a better sense of what lenders will actually see, for a small fee you can get one representative FICO score at myfico.com.

Look for mistakes

According to a Zogby International poll, one-third of people who pull their credit reports find errors, so check yours closely. When you get your FICO score at myfico.com, you’ll get a copy of the report it was based on. You’re entitled to one free report from each of the three credit bureaus every 12 months. So once you have your score and the report it was based on, you can get the other two reports for free at annualcreditreport.com

If you find errors, request corrections, following the instructions on each credit bureau’s website. Inaccurate delinquent marks are common. Fixing just one of those can improve your FICO score dramatically.

Never be late on payments

Your payment history is the most important part of your credit score. Lenders can’t report late payments to the bureaus until they’re 30 days past due. But keep track of your payment due dates and take precautions not to be late at all.

If you know you can’t pay a bill on time, think about getting a quick payday loan to pay the bill. If you will be able to get by on your next paycheck after paying the loan back, a cash advance can save your credit score, but don’t let payday loans become a habit. If you make a late payment, getting right back on track will eventually improve your score, but if you fall more than 30 days behind, the damage to your FICO score can haunt you for years.

Don’t use more than 20% of your total available credit

Another important factor in calculating your score is how much you owe compared to how much credit is available to you. According to Ulzheimer, 10% is ideal, but a ratio as high as 20% is acceptable. Unfortunately, banks are scurrying right now to raise interest rates before new regulations go into effect (read Credit Card Company Comeuppance), and they’re also rushing to lower credit limits and cancel unused accounts, all of which make it more difficult to maintain an ideal ratio.

Be aware of the limits on your credit accounts, watch closely for changes on your monthly statements, and don’t use more than 20% of your available credit on any card or in total. If you’re thinking about getting a home or auto loan, try to reduce your account balances even farther before you apply.  If you’re working to pay down your debts before applying for new credit, remember that it may take a couple of months before reduced balances will appear on your credit report.

Preserve old accounts

A long credit history without late payments is the most important part of your FICO score. Closing old accounts not only increases your credit utilization ratio, it shortens your credit history.  So don’t cancel your oldest cards. You can avoid having lenders close old accounts by transferring recurring charges to them from the accounts you use more regularly.

Don’t try to out-smart the credit bureaus

Other, less important factors are involved in calculating your FICO score, but they are more difficult to manipulate. For example, part of your score is based on your mix of credit types, such as mortgages, car loans, and credit cards. But don’t buy a car or apply for new credit cards just to boost your score. The effects of new credit on a FICO score are complicated, and it is much easier to improve your score by carefully tending a few long-standing credit accounts and making your payments on time.

If you’re looking for a car loan today, apply here!

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The payday loan money blog continues Part III on personal credit with obtaining and reviewing your personal credit report. Here’s how.

A quick Internet search will reveal several sites you can use to order your credit report, but if you want the one that I use, it’s www.freeannualcreditreport.com. This site is a reputable source and will allow you to print off all three of your credit reports from each of the three main credit bureaus.

You will be asked some personal questions in regard to previous street addresses or credit accounts that will help them identify you as the person you say you are. Once you get through these preliminaries, you will be able to print off your report for review.

Understanding Your Credit Report

After printing off your credit report, the next objective is to carefully review it for any discrepancies. By discrepancies I mean anything that appears to be incorrect.

You may have misspelling in your name and address or you may have credit accounts listed that don’t belong to you. This could be a result of identity fraud or perhaps just a recording mistake made by someone else’s creditor or the credit bureau themselves.

Reading your credit report can be confusing at first, but after a short examination you ought to be able to make sense of it. Your credit report will be divided in to several sections. Here is some helpful information describing each section you will find on your report.

Section 1: Personal Information

The section on personal information is the easiest part of your credit report to read and contains information such as SSN, Name, Address, etc. Double check the information here for accuracy before moving on.

Section 2: Credit History

The credit history section contains the bulk of the information on your credit report. It lists all the information for your past credit accounts including the date they were opened, closed, account numbers, names of your creditors and if you still owe a creditor, the minimum payments, the total balance left on the account and the current status of the account whether delinquent or in good standing.

If you possess accounts that are not showing on your credit report, it may be because they are relatively new or the account resides with a company that doesn’t run credit checks when applying for their service. This would include companies like payday loans lenders. Some payday loans lenders don’t require credit checks at all, making them a prime source of extra cash for individuals with a bad credit score.

This information is pretty straightforward, but there may be some things you question, so I will list them below for your understanding.

• Internal Collection: The creditor is in the process of trying to collect the debt.
• Charged Off: The creditor tried to collect the debt, couldn’t and threw
  in the towel.
• Numbers prefaced by R or I: You will see a lot of the numbers on your accounts prefaced with the letters R or I. “R” stands for revolving credit accounts where “I” stands for Installment loan accounts. The lower the number that follows, usually between one and nine, the better the payment history on that account.

Section 3. Public Records

If you have anything in the public records section, you have a long road of credit repair ahead of you. This is the section where things like defaults and or bankruptcies are reported and is a big red flag to anyone thinking about extending a line of credit to you.

You will have to be diligent and patient as these things can take a long time to cycle of your credit report. For example, a bankruptcy can take as long as 10 years to cycle off.

Keep in mind, however, that these public records are easier to deal with as they get older, provided you maintain a clean credit history between then and now. Your credit score, however, won’t come to its full potential no matter what you do until they clear off your report altogether.

Section 4. Inquiries

An inquiry is marked on your credit report whenever the creditor you’re applying for financing through checks your personal credit. These inquiries could also be insurance providers as well as employers you applied with and gave consent to run your credit.

The more credit inquiries on your account, the more risky you appear to creditors as they might tend to think you will overextend yourself with two many open accounts and therefore not be able to pay them on time.

The number of inquiries typically doesn’t affect your credit score too much, but as a general rule of thumb you will want to be conscious of how often you are opening or applying for accounts or services that require a credit check.

In Conclusion

Take the time to download and review your credit report and join us again for Part IV of this series on the payday loans money blog.

I hope your report fares well!