What's Your Score?

How is it that you can apply for a mortgage, credit card, or car loan over the phone and be approved or declined in a matter of seconds? For speedy access to credit - and the mountain of credit card "preapprovals" you get in the mail each month - you can thank an invention called the FICO score.

Your FICO score is the most common type of personal credit score, used in some form by most lending institutions. The FICO score tells lenders in a very simple way how likely you are to repay your debts on time. Ranging from 300 to 850, your FICO score is calculated according to a formula developed by the Fair Isaac Corporation (hence the acronym "FICO").

What everybody wants, of course, is a high score - the higher the better. With higher scores come lower interest rates. How do you get a higher FICO score? First, you need to know the factors that influence your score. In order, they are:

* How you pay your bills (35 percent of your score). How consistently have you made your payments on time? If you've paid bills late, how many times were you late? How late were you? How much money did you owe? Have you ever had a debt in collection? What was the size of the debt? Have you ever filed for bankruptcy?
* Your total outstanding debt (30 percent). Outstanding debt is debt of all kinds, including mortgages, car loans, credit cards, home-equity lines of credit, and any other loans that are reported to a credit agency. Another important factor here is how much unused but available credit you have on your credit cards. The absolute amount of available credit you have is less important than how close you are to maxing out the credit you've been granted. The highest scores go to people who use credit sparingly and keep their balances low.
* The length of your credit history (15 percent). The longer you've had and used credit, the higher your score. You get even more points if you have established long-term credit with the same lenders - a reason why you might not want to close long-term credit cards, even if you don't use them very much.
* Mix of credit types (10 percent). Your score is higher if you have a variety of fixed-payment loans and revolving credit.
* Recent applications for credit (10 percent). A number of applications for credit over a short period of time raises a red flag for lenders, as it is often a sign that a person is in a cash flow problem. The FICO formula takes points away for this. Multiple applications for a specific type of credit in a concentrated time frame - when you're rate shopping for a mortgage, for example - don't count against your credit score.

What doesn't have an effect on your credit score? Demographic data like your age, sex, race, education, marital status, and how long you've held your job or lived in your current home. Perhaps surprisingly, your income and whether you've ever been turned down for credit also have no bearing on your credit score.
How to Raise Your Score

Just as there are things you can do that will lower your credit score, there are also things you can do to raise it, including:

* Pay your bills on time.
* Make more than the minimum payments, especially toward credit card accounts with balances close to your credit limit.
* Transfer a portion of the balances you have on cards that are nearly maxed out to cards where you are well below the limit.
* Challenge any inaccuracies on your credit reports. You're entitled to a free credit report every year. Check it at least that often to guard against mistakes.