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Your FICO Score

Nearly every financial decision you make for the rest of your life will be tied to your FICO score. Don’t let that scare you! By taking the steps to read this article, you are already showing that you're proactive.

You owe it to yourself to know your score, how it is used and what steps you can take to improve your score. Here, you will find basic information and tips to take responsibility for your score.

FICO stands for Fair Isaac Corporation, the company that created the formula for your credit score. Possible scores range from 300 – 850, with 850 being the best. Your FICO score provides potential lenders (such as credit card companies or landlords) with an unbiased look at your risk.

A high FICO score may mean lower interest rates on loans. It can also affect your auto insurance premium or your ability to get a particular job you have applied for. FICO scores are used like colleges use SAT scores. It helps these groups assess whether they want to accept your application, or what terms they will offer you.

The five main categories that account for your FICO score are:

  • Record or paying bills on time: 35%
  • Total balance owed on credit cards and loans, compared to total credit limit: 30%
  • Length of credit history: 15%
  • New accounts and recent applications for credit: 10%
  • Mix of credit cards and loans: 10%

According to financial expert Suze Orman, the following are tips to improve your FICO score:

  1. Check your credit report on a regular basis (make sure you view one from each of the “big three” agencies per year – Equifax, Experian, TransUnion).
  2. Report any inaccurate information and follow up with the credit bureaus to be sure it was changed correctly.
  3. Focus on what matters most to the credit bureaus – Pay your bills on time. If you get yourself in a situation where you can't pay the full amount, at least pay the minimum balance due on time.
  4. Manage your debt-to-credit-limit ratio – The lower the ratio, the better. Make sure that the combined open lines of credit you have do not exceed what is reasonable for your income. Also, make sure you have a low utilization rate. If you have $10,000 in open credit lines and a combined $6,000 balance due, your utilization rate is 60%. Utilization rates around 15% are typically viewed as more favorable.
  5. Protect your history – Good items can remain on your credit report forever and bad items remain for up to seven years – from the point you resolve the issue.
  6. Create the right mix of credit – Don’t apply for a lot of new cards at once. Try to have a mix of that includes a credit card, maybe one retail card and a loan payment – such as an auto loan. In the future, a mortgage payment will help add to a healthy mix.