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Credit and You: Avoid the Minimum Payment Scam and Increase your FICO score

Are you one of those people that just pay the minimum credit card payment every month? Are you sure that will pay off your credit card, eventually? Think that at least it will keep you looking good to the FICO people? (And just who are these FICO people?) Well sit down, and take a good hard look at what your minimum only payments are doing to you.

Say you have a credit card balance of $2000 at 19.8% interest. The minimum credit card payment will probably be able 2% of this balance. At this lovely rate of service you will be paying the minimum payment for 502 months for a total interest payment of $7969. That's nearly 4x what your original balance was, JUST IN INTEREST. How to combat this evilness?

Now say you pay that minimum but add a quarter to the payment. That's right, just a quarter. That extra 25cents will help you pay off that balance in 168 months (a savings of 334 months) and with only $2720 in interest (a savings of $4916). Wow. What a quarter can do for you.

Even better? Make just flat monthly payments of a mere $70. Probably less than you spend a month in lattes. That $70 payment will pay off your balance in just 39 months and will keep you paying only $727 in interest. This latte miracle payment will reduce your months of payment by 463 and your interest by $6909.

Remember that it is a slow process to rebuilding your credit. It takes 6 months or longer for on time, more than the minimum payments to make a difference; but you are showing creditors that you have a strong financial foundation and can handle your debt load. With patience, your score can steadily increase, making it easier for first time house buying, new car shopping, and financial freedom. Easier still is never getting into financial trouble and avoiding the dreaded minimum only payment scam.

Your credit rating is measured by a numeric score called a FICO score. It was developed by Fair Isaac and Company and ranges between 350 and 850. The Median FICO score in the United States is 723. What is this number? How is it determined? How can you increase it? The answers are all here.

What the number is: a basis for credit decisions that changes over time as your credit actions and activity changes. The higher the number the more likely you are to be approved for your loan and qualify for lower interest.

How the number is determined: According to MyFICO, the number is comprised (approximately) 35% for your payment history, 30% on the amount of debt you owe, 15% on the length of your credit history, 10% on your new credit (the number of new credit cards), and 10% on the types of credit you have (whether its revolving credit, loans, mortgages, etc). What it doesn't take into account is anything about you as a person (race, sex, religion, marital status, age, etc), Your salary, Where you live, Your interest rates on mortgages or credit cards, Any rental obligations or child/family support obligations, information that isn't included in your credit report, or any information that is not proven to be an indicator of future credit performance. Bankruptcies not only scar a record for 7-10 years, but are an indicator of future credit turbulence. Expect these to plunge your credit score and be especially patient until they roll off your credit report. When they do, FICO score numbers increasing 100 points isn't too uncommon.

How you can increase the number: Be on time with your payments, several months of paying all your bills on time can slowly begin to raise the number. Getting caught up on all your bills and paying down your accounts is also good. Getting under 50% of your credit limit and paying more than the minimum will keep your credit score higher. Contact your credit reporting agencies and get reports. Many of them have errors that you can correct. This will keep your report accurate and may increase your score. You can get a free credit report in some instances; some states can get up to two a year free, and the Federal goverment recently started a program allowing all US citizens to get a report once a year. Check on your situation with the websites at the end of this article to see if you qualify for a free report.

For more financial help and tips, most consumers can find their answers at any one of the credit reporting agencies.

Credit Websites for the Financial Consumer:

This article was written by Tina Samuels. Tina Samuels is a freelance writer and book author out of Rome, GA.