What Do FICO Scores Mean to You?

Although the concept of a FICO credit score may seem a bit abstract to most consumers, this three-digit score is the primary factor companies use to determine whether or not you can obtain a loan, open a new credit card account, qualify for low insurance rates, rent a house or apartment, and even be hired for a new job. So you can see that your FICO score is a vital element of your financial information; and one you should know as much about as possible to ensure a high credit rating.

Who calculates FICO scores?

The methodology behind FICO score calculations was developed by Fair Isaac, a company which revolutionized how lenders measure a consumer’s creditworthiness. All three of the nation’s credit bureaus – TransUnion, Equifax, and Experian – use FICO methodology to analyze the data contained in your credit report and compute your credit score. And just as each credit bureau’s credit report on your financial history is unique, so are the credit scores they calculate for you. In fact, scores between the three agencies can vary by as many as 40 points.

What is included in FICO scores?

Your credit scores are based on five different parts of information contained in your credit report: the payment history on your credit accounts, how much you owe on your accounts, how long it’s been since your first obtained credit, if you’ve opened new accounts recently, and the types of accounts you have. While positive credit report data in these categories will help raise your credit score, negative information can have a damaging effect.

How long will negative information on my credit report impact my credit score?

Negative information on your credit report will decrease your credit score, but the longer it’s been since the negative data was recorded, the less impact it will have. The derogatory information will remain in your report for at least seven years in the case of late payments, foreclosures, bankruptcies, collections, and any public record items such as tax liens or law suits.

How can I improve my FICO credit score?

The two best ways of improving your credit scores are: 1) Make sure you pay all of your bills on time by sending them to your creditor at least ten days before the payment is due. In some cases, you’ll be able to make your payment online in order to meet the deadline. 2) Keep the balances on your account low and, if possible, totaling not more than 50 percent of your credit limit. If your balances are higher than the 50 percent rule of thumb, try to pay them down as quickly as possible by paying more than the minimum due each month or setting up a pay down strategy. It may take some time to pay down your debt, but you’ll enjoy the benefits of a much higher credit score in the long run.