Your FICO score is a term used to measure your overall credit worthiness. It is based on the information provided in your credit report. The report, in turn, reveals information about your past and present payment patterns. It also lists details regarding your credit history and the different forms of credit you currently have.



In today's world, you'll find that your credit report and your credit score can make a big difference. Some employers will want to check your credit rating before hiring you. Certain car dealers will look at your FICO score before granting you a loan. Insurance companies, banks, and even landlords may also be interested in your credit standing.

An Inside Look at your Credit Report

Now that you understand the importance of having a good credit report, let's break down the information that goes into one. First of all, a credit report reflects the current bills and loans that you have. It also shows whether or not you make payments on a timely basis. If a bank sees that you have a history of paying your bills on time, it will be much more likely to grant you a loan. Creditors use the payments you've made in the past as an indicator of how well you'll make timely payments in the future.

Your credit report will reflect the type of credit that you carry. It will list details regarding the credit cards you own, the types of car and home loans you have, and any other outstanding or unpaid balances you may carry. It also includes any debt you might have with banks, utility companies, telephone companies, hospitals, or any other organization.

The facts found on your credit report are the basis for your credit score. The various numbers are plugged into a complex formula in a computer-based used to generate the final score. The end result is a three-digit number. It ranges between 300 and 800; the higher the number, the better the score.

Your FICO Score

FICO stands for Fair Isaac Corporation, the company that developed the most widely used model to calculate a credit score. Only the information in your credit report is considered for your FICO score. The system uses both positive and negative information regarding your credit when calculating a final score.

Here are a few key points to remember for managing your score:

- Your history of making payments on time has a large impact on your final score. If you've missed credit card payments, mortgage payments, or are behind on certain loans, it will show up on your score. That said, an overall solid credit history may outweigh a few late payments.

- Owing money isn't a bad thing, but owing too much of it can affect your score. The amount of debt you carry, compared to how much income you earn, is taken into account. The lower this ratio is, the better your score will be.

- Generally speaking, your FICO score increases with a longer credit history. Creditors want to know how efficiently and responsibly you manage your available credit over time.

- For those without a long credit history, opening several credit accounts in a short span of time is often viewed negatively by creditors. Before opening a new account, make sure that it is a wise financial decision for your situation.

Spotting Fraud and Finding Errors

Although you can't view the exact formula that calculates your credit score, you can look at your credit report to check for any errors. In fact, it is a good idea to check your credit report occasionally for any mistakes or unauthorized activity. If you find an error or do not agree with a certain aspect of it, the Fair Credit Reporting Act gives you the right to dispute the matter. Be sure to report anything out of the ordinary to the appropriate credit bureaus.

If you spot inaccurate information, you can notify a CRA, or Consumer Reporting Agency. Send the agency a letter about the problem, and include copies of any documents relating to the case. In your letter, clearly identify each disputed item. State the facts, explain the disputed information, and request either a correction or deletion. The credit-reporting agency will look into the matter and either verify the item in question or remove it from your report.

There may be items on your report that need further explanation, such as late payments due to job loss, unexpected medical bills, or military call-up. If this is the case, send a brief statement to the credit-reporting agency, and your credit profile will be updated with the relevant information.

If you are not able to clear up the matter right away, ask the CRA to include a statement of the dispute in your file and in any reports in the future. Secondly, in addition to writing to the CRA, inform the creditor or other source of information about the dispute status. If you detect any fraudulent activities in your free credit report, contact the Federal Trade Commission at its hotline: 1-877-ID-THEFT (438-4338).

Credit Improvement and Protection

Once you have a solid understanding of credit scoring, you're ready to work on establishing and maintaining good credit. By taking the right steps and being responsible, you can enhance your credit score over time. Here are a few guidelines to help you get your credit back in shape:

Handle your bank account responsibly and don't let your checks bounce.

Pay all your utility bills on time, and close the accounts when you change locations.

Keep a credit card and use it responsibly. Make sure the card is paid on time (at least the minimum amount payable).

Keep credit card balances low.

Check your credit report for accuracy.

Don't open multiple accounts frequently if you have a short credit history.

Don't close an account in order to remove it from your record.

Shop for a loan within a focused period of time.

Contact your creditors or a legitimate credit counselor when you go through financial difficulties.

To establish a good credit score, it is essential that you show creditors that you are financially responsible. In doing so, you'll not only raise your score, but you'll also be able to secure higher credit limits, better interest rates, and more types of credit.