Understanding and Maximizing Your Credit Score

You can maximize your credit score by understanding the individual parts of the formula used to determine your FICO score.

FICO is the "be all and end all" when it comes to credit scores. FICO is the acronym for Fair Isaac Company, the company that created and computes the score with which to determine your credit worthiness.

FICO utilizes a score from 300 to 850, which is based upon information they receive from the big three credit reporting agencies, TransUnion, Equifax and Experian. Your score is based upon a number of factors, but the most frequently asked question is, "What percentage of what aspect goes into my credit score?" If you know this, you will know what you need to do in order to raise it and maintain it at the highest possible level:

35% of your score is determined by timely payments.

30% is determined by the amount of debt you have in proportion to the amount of credit that you have available. You should keep your balances under 40% of your credit limit.

5% is based on the length of your credit history. It takes time to build this portion of your credit score, so this 15% is quite significant.

10% of your score is based upon any recent applications for credit. The more recent the applications, the lower your score, though a car or mortgage loan application will not carry the same weight.

The final 10% is based on what kind of credit you have. You want to have a good mix of credit. An auto or home loan, in addition to your credit cards is best. If you have a bad credit score, which is considered to be between 500 and 580, you have little hope of getting financing, especially in this financial climate, even at an exorbitant interest rate. But, if you DO manage to get that loan, it can be the first step to repairing your bad credit and you should take it.

Be careful when using your credit line. Repaying it early will help to reduce the overall interest paid and is easily accomplished by making an additional principal payment each month.

A high FICO score is 850, though people rarely get that score. The average credit score is somewhere between 680 and 700. 620 is considered poor and 720 is considered good.

Your first step should be to obtain a copy of your credit report and make sure there are not any errors that are negatively impacting your score. It does happen. You can receive one free annual copy at annualcreditreport.com and you are authorized a free copy if you are denied credit.

Understanding your credit score and maximizing it will save you a ton of money in interest charges over the rest of your life and will set you up to take advantage of financial opportunities as they arise.

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