If you own a credit card, you have probably heard about your credit score and how important it is when apply for loans. FICO credit score on the other hand is the short form of fair Isaac and Co. the company that conceived the idea and developed the software that enables financing companies to compress a person’s credit history into more meaningful form. This number was adoptee by the 3 major credit card companies as the best basis for representing a person’s credit history. The fico scores adopted by the 3 credit bureaus, Experian, Trans Union, and Equifax range from 300 to 850.
Differentiate Credit Score form Credit Report
The credit report will contain your credit history from where the credit score is drawn. This is the information that makes up the report:
• Your outstanding credit accounts
• Your payment history
• The times that you have inquired abut credit
• How you have used up your credit.
• If you have been declared Bankrupt
The fico number will not appear on your credit. The report, which you are entitled to get a copy free of charge each year, will contain your credit history for the last seven years. The only thing that will go beyond this period is any bankruptcy report that will haunt you for ten years. Make sure that you check for error s in the report when you get your copy.
Since the FICO credit score is calculated independently by each of the three credit rating agencies, you will have different scores. If you want to know your score, you will have to pay a small fee since it’s not part of the free credit report.
Components of the Credit Score
The information from your credit report that makes up your score is:
• Payment History – 35%
• Total debt – 30%
• Length of your Credit History – 15%
• Any uptake of Credit – 10%
• Credit variety – 10%
All these aspects of your report are important but there are some with more weight than others. The customer’s credit payment history will form the largest share of their credit score. Together with the amount of credit that you have taken up, you get 65% of your score. These are therefore the areas that you should lay more emphasis on if you want to improve your score.
The importance of your FICO Score
• The lenders look at the score before they decide that they will offer you the amount that you are seeking for buying a car, your mortgage or any other form of personal loan.
• The cost of the money that you are give will also depend on your score. If you have lower scores, the lender will think that you are a riskier borrower and charge you more for the loan. To compensate them for the extra risk that they are taking.
How to Improve Your Credit Score
Your credit score is reviewed monthly. This means that if you made some mistakes in the past, you will have the opportunity to correct them. This will however take time as the report is kept for a long time after the mistakes that you did are forgotten.
The things that will help you start mending your score are:
• Making you monthly payments on time- payment history is one of the greatest single factors on your credit score. If you improve it you will improve your overall credit score.
• Find ways to cut back on your total amount of debt. Since the amount of debt is the second largest factor affecting your score, you should concentrate on reducing your debt balance.