Your FICO, or credit, score is calculated independently by the Big Three credit reporting agencies (viz., Equifax, TransUnion, and Experian) based upon a shared formula. Your score has a huge influence on your financial health. An improvement of just 40 or 50 points can translate to your saving thousands of dollars in interest payments over the course of a 30-year mortgage, for example. Anything you can do to increase your FICO score can literally mean money in your pocket.
The FICO scoring system was created by Fair, Isaac & Company. By learning exactly how your credit score is determined, you can figure out which areas of your financial life require significant improvements. (note: the following information is up-to-date as of the time of this writing but is subject to change):
History of making on-time payments: 35%
Total amount of debt owed: 30%
Length of your personal credit history (in years): 15%
Amount of new credit instruments you have: 10%
The variety and types of credit used: 10%
Given these elements, here 5 tips for maintaining each area of your credit-related life in good standing with the reporting agencies:
1. Make your payments on-time: note that items like bankruptcies and legal actions against you could also hurt this part of your score.
2. Pay off some or all of your debt: the more you owe relative to the amount of credit you have, the worse things look. Try to pay down your debt so that your total unsecured debt (e.g., credit cards, department store cards, etc.) is less than 50-70% of the amount of credit you have.
3. You can’t directly control the length of your credit history, but it may be helpful to know that the more time that goes by, the better things will be for you for this component of your score.
4. Avoid applying for too many new credit instruments (e.g., credit cards) at any given time. If you need more, add one or so per year at the fastest.
5. In the credit world, variety is a good thing. If you have a combination of credit cards like Visa and MasterCard, along with charge cards like American Express and Discover, as well as installment debt like an auto loan and store cards, you will be in good shape. Obviously, keep in mind tip #2 above and do not rack up too much debt on any one card relative to the total credit line offered.
Keep these 5 tips in mind as you work to improve your credit score.