Your credit score is an all-important, three-digit number that determines much of your financial life. Too bad more of us don't understand how credit scores work.
See also: Having bad credit often costs you more.
Maintaining a healthy credit profile is important because your credit rating will impact everything from whether you get a much-needed loan to what your life insurance and auto insurance rates will be.
Here is a quick primer on what goes into your credit score, as well as tips you can use to positively impact your credit rating.
What Does FICO Mean Anyway?
The FICO score gets its name from the company that developed it, Fair, Isaac and Company. FICO scores range from 300 to 850 points, and to get a peek at yours you generally have to pay for it. You can get your scores from the website. They currently cost $19.95 each. Other credit scores can be obtained free. Unfortunately, though, you can't get a FICO score without paying for it. You can get a free score directly from Fair Isaac by signing up for a 10-day trial service for credit monitoring. The credit monitoring is $14.95 a month. FICO explains the deal in the fine print on their home page.
Your credit scores are calculated based on the information contained in your Equifax, Experian and TransUnion reports. To calculate your FICO credit scores, Fair Isaac look at the data in your credit reports and evaluates them like this:
Payment History — 35 percent
Amount of Debt Owed — 30 percent
Length of Credit History — 15 percent
Mix of Credit — 10 percent
Inquiries or New Credit — 10 percent
Here is what you need to know about each of these areas.
Payment history: 35 percent of your credit score
If you have no late payments in your credit files, that will have an overwhelmingly positive impact on your credit score since your payment track record is the single biggest determinant of your FICO score.
But even if you had one or two late payment in the past, all is not lost. The FICO scoring system takes "recency" into account in evaluating how responsible you are at paying your bills. Therefore, a late payment that happened three years ago won't have as much an impact on your credit scores as a slip up that occurred three months ago.
Bottom line: try to always make all payments on time. Even if you can only make minimum payments, this helps guard your credit rating.
Amount of debt owed: 30 percent of your credit score
When you're focused on eliminating your bills, you might think that debt is debt. But the credit scoring system doesn't treat all types of debt similarly.