Hot or Not? How FICO Keeps Score and How to Boost Yours

FICO® is the only judge in the credit beauty pageant. Your credit history, kept with the three credit bureaus, is fed into FICO®’s proprietary (read: secret) equation and out spits your credit score. Much like cattle, you don’t have a choice in whether or how you’re branded. Yet, on this score you will be judged by banks, landlords, and employers.

A credit or “FICO” score is a number (inexplicably between 300 and 850) that evaluates your past use of credit.  The Fair Isaac Corporation (hence the term “FICO”), created and modifies the formula used to determine credit scores.  You have a separate score with each credit bureau, using the data that they have gathered.  While these bureaus will give you your credit score (for a price), this may not be the number they report to banks.  They frequently use a more sophisticated algorithm for your “real” credit score than for the one they sell you.

Generally, your FICO score is based on payment history (35%), amount of outstanding debt (30%), and the types of credit you currently have, the number of inquiries on your credit, and the length of time you’ve had credit.

Here are a few things you can do to improve your credit score:

• Always pay your bills on-time
  Late payments can substantially drop your score and may stick around for a bit over seven years.  Plus, credit card companies will charge you a hefty late fee AND may raise your interest rate to a “penalty” amount of, say, 24%.  If you are late with a payment, call your creditor as soon as possible and explain the situation.  They will frequently waive the late fee and you can ask them not to report the payment as late.
• Pay down your revolving debt (i.e. credit cards)
  You want to have your ratio of available credit to outstanding debt of less than 30%.  For example, if you’ve got a total of $10,000 in available credit, you shouldn’t owe more than $3000 on those cards.  Installment loans (car loans, mortgage, student loans) will also affect your score, but not as much as revolving debt if you consistently make on-time payments.
• Establish a solid credit history
  Not having enough of a credit history (called a “thin file”) can hurt your credit score.  You want your credit report to reflect a proven track record of taking out credit and paying it back on time.   Unfortunately, paying off student loans and using your debit card generally will not be sufficient for building a credit score.  If you’ve managed to swear off debt, you should still keep a couple of credit cards (preferably your older accounts).  Build (or maintain) your credit history by using the cards once or twice and paying off the balance off each month.