How Your FICO Score is Determined and What You Can Do About It

Most people strive to get the highest APY possible on their investments, which is great. Your money should work for you, and in order for your money to do that, it’s key that it at least beat the current inflation rate so that your hard-earned dollars don’t lose value. However, if you’re carrying a large balance on a high-interest rate credit card or on other loans, that great 4% savings rate you found could be quickly negated by high interest rates you’re paying for loans. During a credit crunch, only borrowers with the highest credit ratings are usually able to get loans at decent rates (if they can get them at all). Although some experts say the recent credit crunch is beginning to end and credit is starting to flow again, one fact remains: the higher your FICO score, the lower the interest rate you’ll pay for loans and credit cards.

Nowadays, even insurance companies use your FICO score to get your credit-based insurance score, which can drastically affect your insurance premiums. So, how can you raise your FICO score? Payment history and amount-owned balances make up about 65% of your FICO score, so those two things are key to a good score. Payment history makes up about 35% of your score, so making payments on time is essential. If you’ve had some late payments in the past, the impact of those delinquencies fades as time progresses while your recent good payment history takes precedence.

Amount-owed balances make up about 30% of your credit score, and so paying down (or paying off) your balance is the quickest thing you can do to raise your score. It’s important to realize that using credit is not the same thing as carrying a balance—so if you can make charges on your credit card and pay the balance in full every month, that’s ideal. This is because credit scores not only determine your risk; it also analyzes how you use your credit. You should be “using” some of your credit (like on credit cards), but you don’t have to (and shouldn’t) carry a balance to do so.

Other factors that influence your credit score include things like the length of credit history and the number of recently opened accounts. A rapid new-account build up can flag you as a potential risk, as do a lot of credit report inquires for new accounts at different banks. If you want to do some rate shopping to see which bank will give you the best APR for a car loan, for example, it’s best to start and complete your search in a limited time window. FICO scores will distinguish between a search for a car loan made at multiple banks within a few days of each other, and a search for a car loan, two credit cards, and department store card made within two months of each other.

It’s also important to check your credit reports once a year to make sure there are no errors on your report that could be weighing your score down. You can do so for free at www.annualcreditreport.com. This site is the only authorized source for your free credit report under federal law. Other places that advertise “free credit reports” will usually try to get you to purchase other services or pay some type of fee.

You also should be extremely wary of any place that promises a quick fix for your credit report. In fact, the FTC has an entire page on their website devoted to how you can avoid these scams. Attorneys at the nation’s consumer protection agency say they’ve never seen a legitimate credit repair operation that makes claims they can do things for you like “erase your debt.” However, there are things you can do to improve your credit score on your own—but it will take some time.