Improving FICO

A FICO credit score is the three-digit number that summarizes for lenders the risk that you present as a borrower. The FICO credit scoring system is used by most lenders and all three major credit reporting agencies (Experian, Equifax, and TransUnion). Perhaps you've had some financial problems that have lowered your FICO score, or maybe you're just starting to establish credit. Either way, improving FICO is something you need to plan for and work at. FICO scores range from 300 to 850. Scores of around 680 or higher are considered good.

Using Credit

FICO (an acronym for Fair, Isaac, & Co., the company that developed the scoring system) measures several specific credit behaviors. By knowing what FICO measures you can make sure you use credit in ways that improve FICO. First and foremost, you must pay bills on time---this counts for more than anything else in the FICO scoring system. A rare payment a few days late won't hurt much; however, any payment that is more than 30 days late can take up to 100 points off the FICO score.

Keep the amount of debt you owe well within your ability to pay. If you have excessive debt for your income, consider consolidating debts so you can keep payments current and reduce the total. The type of debt also matters, especially credit cards with large amounts of available credit. Asking lenders to lower credit limits to eliminate available credit will improve FICO. Avoid applying for or closing credit accounts any more than necessary. Frequent account changes (especially if you are turned down) will lower a FICO score. Finally, be patient and consistent. Part of the FICO score is based on how long a record of good (or poor) use of credit you have. It may take a couple of years of timely payments to rebuild a sagging score.

Dos and Don'ts

One way to improve FICO (or at least to prevent damage) is to contact the lender when you run into trouble. Many lenders will refrain from reporting a late payment if you can make and keep an arrangement to bring an account up to date within a reasonable time. Maintaining a stable employment history and a regular savings/investment program also helps to improve a FICO. If you have been forced to declare bankruptcy, it will take several years to rebuild your credit. A good way to start the rebuilding process is to get a secured credit card (one for which you make a deposit as collateral) so you can begin creating a record of on-time payments.

Certain major problems count as negatives that will stay on your credit history for years. These include defaults or court judgments against you for unpaid debts, tax liens, and foreclosure. Bankruptcy will remain on your credit history for up to 10 years. Don't neglect to monitor your credit history for accuracy and contact the credit bureau(s) to have any erroneous information corrected. You are entitled by law to a free copy of your credit report once a year from each of the three major credit reporting agencies (see link below).