Ever heard of FICO? You should have by now. The FICO score is a secret - well, not really - indicator of how capable you are of paying off debts and meeting financial obligations. For example, a home seller or car dealer might ask a major credit bureau like Equifax, Experian or TransUnion for your FICO score before extending a certain offer to you on a home or car purchase. The FICO is a simple credit score originally devised by Fair Isaac & Co. in the late 1950s. Since then, FICO credit checks have become an almost universal way for creditors to find out how trustworthy their prospective debtors are.
So how does a credit bureau calculate your FICO score? Well, we don't know and we can't tell you, and the Federal Trade Commission has ruled that this is an acceptable condition. The credit bureaus and Fair Isaac & Co. do not explain how they compute credit scores, but there are many factors that clearly help or hurt your FICO score. Some of these factors from your financial past include:
- Number of years of experience having credit
- Number of late payments made
- The amount of credit used as a percentage of the total available credit amount
- How long you have lived at your current home or apartment
- Your employment history
- Bankruptcies
Actually, now that you've read this far, we can tell you a secret: You actually have three FICO scores - one from Equifax, one from Experian and one from TransUnion. Some creditors request all three FICO scores, while others might only use the middle score in making a final decision about a potential credit transaction with you.
The best ways to improve your FICO score are to always pay your bills on time, only have a few credit cards and use them on a limited basis, and applying for not too much (but not too little) credit.