Five Ways To Improve Your FICO Score

Your FICO score, also known as your credit score, comes from a company that was started back in 1956 called Fair, Isaac Corporation. Fair Isaac was the creator of the credit scoring system. This system simply tabulates your score based on how good (or bad) you are at managing your debt. Your score reflects whether you pay off your credit card balances each month, whether you pay other bills on time, how many cards you have, and what percentage of your credit card limit you use each month, as well as a number of other algorithms. All that information is provided to them from the three credit bureaus, Equifax, Experian and TransUnion, that track just about every credit transaction move you make.

This score is a present day predictor of your future ability to pay back money that you want to borrow. This number indicates to the lender if you are going to pay that money back on time and in full, or if chances are you will default. The more of a risk they think you are the higher the interest rate they will charge you to make up for any losses they may sustain because of your failure to repay.

Your FICO score can play a very important part of any car loan, mortgage loan, the interest rate on your credit card or whether you deserve a boost in your credit card limit. It is also used by insurance companies in setting premiums and landlords deciding if they want to rent to you. And now, some employers are checking your credit record during the hiring process. So if you want to rent an apartment, get a job, or even qualify for a zero percent interest rate offer on a credit card or a low percent interest rate on a car loan, you need to manage your FICO score.

If you have a low FICO score, there is plenty you can do to get it higher. Here are five ways to improve your FICO score:

1. Pay the minimum due on time each month. You don't need to pay off the balance on your credit card every month to get a good credit score. All you need to do is pay the minimum on time every month and the creditors will be happy. All the creditors care about is whether you are diligent in paying your bills on time, not how much you pay.
2. Reduce your debt-to-credit ratio. Another 30% of your score is determined by how much outstanding debt you have relative to the total available credit limit on all your cards (Part of this calculation also includes how much you owe on car loans and mortgages). The lower your debt-to-ratio, the better. To improve your ratio, there is plenty you can do. For instance, let's say that you have two credit cards. One has a balance of $5,000 and a limit of $10,000, and the other has a balance of $2,000 and a limit of $8,000. That means you have total credit debt of 38%. Now let's say that you manage to cut these balances in half, so you now have just $3,500 in debt and the same credit limit of $18,000; your ratio will fall to 19%. Another way to lower your ratio is to raise your credit limit. But, be very careful to not use that extra money. The whole idea behind this is to lower your ratio.
3. Save your credit history. About 15% of your credit score is your credit history. The more history that you have, the more evidence the FICO organizations have to size up your credit habits. So, whatever you do, don't cancel a credit card you no longer use. When you do this, you are wiping out all that history. Also, when you cancel a credit card, you also lose the credit limit it carries, which hurts your debt-to-credit ratio.
4. Avoid new card offers. The number of cards you have account for about 10% of your FICO score. Too many cards make lenders nervous because you have way too many opportunities to charge up big balances you won't be able to pay.
5. Get the right mix. A mix of credit cards and loans account for the final 10% of your FICO score. Lenders like to see that you can handle multiple credit lines simultaneously. For instance, one or two credit cards and an installment loan, such as a car or student loan.

Since your FICO scores are made up of the information that is on your credit reports, it's important to manage and monitor your credit activity. For more on how to access your credit information, go to annualcreditreport.com.