How Do Credit Scores Work?
Who is FICO and What Do They Do?
Despite having an official-sounding acronym for a name, FICO is not a government agency or a major financial institution. Originally called the Fair Isaac Corporation, FICO is a firm that specializes in what's called "predictive analysis." In other words, they use available data to make predictions about the future. In the case of credit scores, they use data from major credit bureaus to predict your ability to pay back debt.
A credit score can range from 300 – 850. The higher your score, the better. Your credit score not only affects whether you'll be approved for a card but can also influence the interest rate you pay. So, a good-to-excellent score of 700 or above can help protect you from getting squeezed by banks for more interest.
Who Are the 3 Major Credit Bureaus?
Credit Score Tip #1: Pay Your Bills on Time!
This one may seem obvious, but paying bills on time is truly the most important step in raising your credit score. The biggest chunk of your credit score is your payment history, making up 35% of the score.
When you pay a bill late--whether it's for your credit card, your car loan, your mortgage, or your student loans--it gets reported to the credit bureaus. If you have trouble organizing your finances, setting up automatic payments from your checking or savings account is a great way to ensure your bills are paid on time, every time.
Credit Score Tip #2 Don't Max Out the Credit Card
The second largest portion of your credit score is devoted to your debt to available credit ratio. Simply put, if you owe too much on your existing credit cards and other loans, lenders will be wary about giving you more money.
If you have $10,000 available to you on your credit cards, and you've used $9,000, the next bank you approach for a loan will see that you've already used up most of what you have, signaling that you may not be in a position to take on more debt. Before seeking a new loan—like a mortgage or car loan—make sure you pay down your credit cards as much as possible! This will boost your credit score and make you a more attractive candidate for that new loan.
Credit Score Tip #3: Start Early
The "age" of your credit history is another factor used to determine your credit score. The earlier you start, the better. Lenders don't want to be your "first"; they want to know that you have experience with paying down debt before they lend you money. So, if you're 18 and thinking about opening a credit card account, know this: It is beneficial to start early, but be careful. Running up too much debt and making charges you can't pay back will do serious damage to your score. So start early, but be smart.
If you follow these three quick tips for improving your credit score, you will be well on your way to an 850 FICO score, and the world will be your oyster!