Understanding/improving your credit score

Lenders use credit scores such as the FICO to calculate interest rates and credit limits. FICO is a score based on mathematical formula developed by the Fair Isaac Corporation. It is the most widely used score in the U.S. According to Wikipedia.com there are several important determinants of your FICO:

* 35% punctuality of payment in the past
* 30% capacity used, i.e., ratio of current revolving debt (e.g. credit card balances) to total available revolving credit (e.g. credit limits)
* 15% length of credit history
* 10% types of credit used (installment, revolving)
* 10% amount of credit obtained in the recent past

The above percentages are approximate. Current income and employment history do not influence the FICO score. Generally, FICO scores range from 300 - 850. Scores at the higher end of the scale reflect a better credit rating.

To improve your credit score so that you can buy a home or get a better mortgage rate:

* Pay your bills on time. Delinquent payments and all collections can have a major negative impact on your score.
* If you are having trouble making ends meet contact your creditors or see a credit counselor. This won't improve your score immediately, but as you begin to manage your credit and pay your bills on time, your score will improve over time.
* If you have missed payments get current and remain current. The longer you continue to pay your bills on time, the better your score will be.
* Pay off your debt rather than moving it around. The most effective way to improve your score in this area is by paying down all of your revolving credit.
* Keep balances low on credit cards and other "revolving credit". Having large amounts of outstanding debt can affect your score negatively.
* Don't close unused credit cards as a short-term strategy to raise your score.
* Don't open credit cards that you don't need just to increase your available credit.

For more tips on improving your credit, visit MyFICO.com