Your FICO Credit Score

Your credit score is calculated by the Fair Isaac Corporation. Fair Isaac looks at information in your credit report, and crunches the data using a proprietary formula.

Note that your FICO credit score is only as good as the information that Fair Isaac has available. If there is incorrect or out-of-date information, it will affect your credit score.

How the FICO Credit Score is Composed

To create the FICO credit score, Fair Isaac uses a few bits of information:

FICO Credit Score Components

• 35% Payment History - Do you pay your bills on time?
• 30% Amounts Owed - What is your outstanding debt?
• 15% Length of Credit - How long is your credit history?
• 10% New Credit - Have you applied for several credit cards in the last few months?
• 10% Type of Credit  - How many and what types of credit accounts do you have?

If you’re trying to improve your FICO credit score, you may need to focus on one or more of the components above.

There’s More to You Than Your FICO Credit Score

Before you break your back trying to manage your FICO credit score, remember that lenders may look at other factors besides just your FICO credit score.

For example, you may be able to show the lender that you just got a better paying job that will allow you to cover all your debt payments.  This is not something that will appear in your FICO credit score.

How Credit Scores Work

A credit score is just a number. The credit score tells lenders how likely you are to default on a loan. By understanding how credit scores work, you can figure out what lenders are looking for and how you can improve your credit score.

Credit scores are designed to make it easy on lenders. They need to decide whether or not to approve your loan. Instead of manually reading through your credit reports, they can just look at a number: your credit score.

The number is generated by a computer program that reads through your credit reports. It slices and dices the data stored at the credit bureaus and spits out a number. Just like a human, the computer program is checking to see if you’ve borrowed in the past and if you generally pay as agreed. The most commonly used is the FICO Credit Score

Credit scores do not determine whether or not your loan is approved. They are simply numbers generated from your credit report. Your lender sets standards on which credit scores are acceptable and makes the final decision.

To improve your credit scores, you have to show that you’re a seasoned, responsible borrower. If you build your credit files with positive information, your credit scores will follow.

Understanding Your Credit Score

Lenders determine your interest rate and credit limits based on a “credit score.” A higher score means you are considered more likely to repay your loans on time, often resulting in a better rate. To understand how to strengthen your credit score, it’s important to learn how it’s calculated.

Why is your credit score important?

Your credit score can affect your ability to get loans or open a checking account. A credit report is the first place that potential lenders, insurance agents, employers and landlords look in deciding whether to lend to, insure, employ or rent to you. Your credit score could also affect future jobs and insurance premiums.

In most cases, it takes seven years for negative information to be deleted from your credit report and up to 10 years for bankruptcy information to be deleted.

What can you do to improve your credit score?

Improving your score may take some time, but it can be done by paying your bills on time, paying down any outstanding balances and staying away from new debt.

How does credit card behavior influence your score?

A creditor or insurance company may deny you credit or insurance because you are too near the credit limits on your credit cards and have applied for too many credit card accounts.

Because credit scores are based on credit report information, a score often changes when the information in the credit report changes. By keeping credit card balances low and applying for and opening new accounts only as needed, you can help change your credit report and your score.

How To Repair Your Credit

Repair Your Credit Yourself

Don’t let anyone fool you into thinking you need to hire a professional to repair your credit. The truth is, there is nothing a credit repair company can do to improve your credit that you can’t do for yourself. So, save yourself some money and the hassle of finding a reputable company and repair your credit yourself.

Get the latest copies of your credit reports
Before you can start repairing your credit, you have to know what you need to repair. Your credit report will contain all the information you need to start repairing your credit. You’re entitled to free credit reports from each of the three credit bureaus each year. You can also order your credit reports directly from the credit bureaus for a fee.

Why should you order all three credit reports? Some of your creditors and lenders might report only to one of the credit bureaus. And, since credit bureaus don’t typically share information, it’s possible to have different information on each of your reports. Ordering all three reports will give you a complete view of your credit history.Make an extra copy of each report in case you need to dispute information.

Review your reports
Read through your reports once you get them. Become familiar with the information contained in each. Using different color highlighters or pens, highlight what you need to repair:

• Incorrect information, including accounts that aren’t yours, payments that have been incorrectly reported late, etc.
• Past due accounts that are late, charged off, or have been sent to collections.
• Maxed out accounts that are over the credit limit.

Dispute inaccurate information
You have the right to dispute any information in your credit report that isn’t correct. When you ordered your credit reports, they should have come with instructions for disputing credit report information. If not, you can send a letter to the credit bureau detailing the inaccurate information. It’s often helpful to send a copy of the report with incorrect information highlighted.

Tackle past due accounts
Since payment history makes up such a large part of your credit score, several past due accounts have a significantly negative effect on your score. Taking care of these is crucial to improving your credit score. Your goal is to have all your past due accounts being reported as ‘current’ or ‘paid.’

• Get current on accounts that are past due, but not yet charged-off. Do what you can to keep accounts from getting charged off.
• Pay off charge-offs.
• Work with debt collectors to take care of your collection accounts.

Bring maxed out accounts below the limit
Your credit utilization is your total debt compared to total credit  makes up 30% of your credit score. Having maxed out credit cards costs credit score points (not to mention costly over-the-limit fees). Bring maxed out credit cards below the credit limit, then continue working to pay the balances off completely.

Get new credit
After you’ve resolved the negative items on your credit report, work on getting positive information added. If you have some credit cards and loans being reported on time, good. Continue to keep those balances at a reasonable level and make your payments on time.

On the other hand, you might have to reestablish your credit by opening up a new account. Since past delinquencies can keep you from getting approved for a major credit card, only make one application. This will keep your credit inquiries low. If you get denied, try applying for a department store credit card. Still no luck? Consider getting a secured credit card.

Tips

• Salvage what you can. Don’t sacrifice accounts that are in good standing for accounts that are not. Continue making timely payments on all your current accounts.
• Get consumer credit counseling. If your debts are overwhelming, creditors aren’t willing to work with you, and you can’t seem to come up with a payment plan on your own, consumer credit counseling is an option for getting back on track.

Information in this article was derived from the About.com Web site.