FICO scores were derived by the Fair Isaac Corporation who use a proprietary formula to gauge creditworthiness. FICO takes into account five major areas to determine creditworthiness: payment history, current balances in relation to credit limit, different types of credit used, length of credit history, and new accounts. The credit reporting agencies, Equifax, Experian and TransUnion use the formula. The three credit bureaus often vary and your score may be slightly different with each bureau.
A FICO score is used by lenders and credit card issuers to predict how likely you are to repay them. Often this score determines your interest rate. You can boost your credit score (FICO) in just a few months. FICO scores range from 300 to 850.
Good: 700 to 759
Fair: 650 to 699
Poor: 649 and below
How to boost your FICO score:
Begin by building your credit history
Like it or not, everyone needs a credit history. Once you are eighteen, apply for a credit card. Gasoline and department store cards are often the easiest to obtain. Having different types of credit such as an auto loan, mortgage and retail accounts increases your FICO. Of course, it’s critical to pay bills on time.
Slowly increase your credit limits. Maxing out your credit limit lowers your score. If your credit limit is $10,000 you shouldn’t be using more than one third of your limit. Even if you pay your balance in full each month, you still don’t want to utilize the maximum limit.
Correct errors on your credit report
Everyone should be taking advantage of their free annual credit report. Review the report for errors and have them corrected. You can first start with the merchant who you believe is in error. If they aren’t helpful, contact the credit bureau. Credit bureaus typically have thirty days to investigate mistakes. If they concur that it’s an error, they will remove the item. Most negative credit history should be removed from your credit report in seven years.