FICO® stands for Fair Isaac Company® which is the company who created the original scoring model for determining your credit score (aka. credit rating) which is based upon the information in your credit history (aka. credit report). The credit score is a highly accurate predication of how likely you are to pay your bills. The credit history is a report maintained by three different credit reporting agencies Equifax®, Experian®, and TransUnion® containing information about all aspects of your use of credit.
The credit score has an effect upon many aspects of your life including approval for loans, loan interest rate, whether deposits are necessary for utility services, employment, remaining employed, many types of insurance, banking, credit cards, apartments, rentals, etc. The lower your credit score, the lower your perceived integrity to pay or maintain services regularly and your ability to pay. The score provides an indication if financial hardship exists or not. Each of the three credit reporting agencies will have a different credit history and a different credit score. The score is determined by the following factors, in order of importance, relating to your credit history:
Payment history - The information about how well you have paid your bills including late payments, accounts sent to collections, and bankruptcies with emphasis on recent activities.
Amount owed - The amount you own on any debt such as credit cards, car loans, mortgages, home equity lines, etc. compared to the amount of your available credit. The closer the amount of existing debt divided by the amount of available credit is to 1, the worse your credit score. Those people with maxed out credit will have a worse score than those with little or no debt. The more credit you have available (even if not used) can lower your score, but it is a lot better than those who use that credit.
Length of credit history - The amount of time you have had credit. The longer you have had a particular credit account the better. People who open new accounts and close old accounts often will have a lower credit rating than those who keep their accounts active.
Type of credit - Having different types of credit on your credit history such as credit cards, mortgages, and car loans provides an indication you know how to handle money better than those people without the same mix of credit.
New credit - The number of times you have applied for new credit. Submitting credit card applications, obtaining mortgage or car loan approval, and even activating utilities requiring a credit check will result in a lower credit rating particularly when the inquiries occur in a short period of time such as one year. Card-hopping for a lower introductory interest rate and obtaining approval from several mortgage companies will lower your credit score causing you problems in the future to obtain credit or a mortgage.
There is no simple answer as to what should be done to improve or maintain a great credit score other than to try your best to balance the use of your credit. Some simple ideas to follow are to pay all your bills on time, keep your balances low, don't have too much credit, ensure you have some types of credit for a long time, limit card hopping, and limit applying for new credit.
Another factor that will have a severe impact upon your credit score is the presence and the age of a bankruptcy. Do not declare bankruptcy unless it is the last possible resort. If you do, then realize the ramifications that decision will have on your credit history for years.
A good web site offering a free estimate of your FICO® score is at http://www.bankrate.com/brm/fico/calc.asp. The accurate way to obtain your credit score is to pay to receive that score from each of the three credit agencies. You could receive that score for free by simply asking a lender who accessed your credit score to provide loan approval.
Return to Credit History/Rating Topics.