Credit Basics Your credit is very important. It can mean the difference whether or not you get a nice car, can own a home, and even if you qualify for insurance. It's not enough to simply pay your bills on time. You need to have a good understanding of how credit is actually judged, or scored. So many factors play key roles, such as how old your accounts are, how many accounts you have and what type they are. What Is FICO? FICO stands for Fair Issac & Company. It is basically a mathematical calculation method for determining how creditworthy you are. FICO is used by Experian, TransUnion uses Emperica, and Equifax has Beacon. For the most part, the FICO people are closed-lipped about the actual scoring process, but we have a fairly accurate breakdown of how it works. Some of the things that negatively affect your FICO score are delinquencies, too many accounts opened within the last twelve months/short credit history, balances on revolving credit are near the maximum limits (maxed-out,) public records (that's really bad stuff like tax liens, judgments, or bankruptcies,) too many recent credit inquiries, too few revolving accounts (or too many revolving accounts.) Understand FICO Scoring If you are trying to build good credit or repair bad credit, you have GOT to have a good understanding of credit scores and actually put it into action. Once you understand how FICO scores work, you can raise your score by following some basic principles: 1. How you pay your bills (35 percent of the score)
The most important factor is how you've paid your bills in the past, placing the most emphasis on recent activity. Paying all your bills on time is good. Paying them late on a consistent basis is bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is worst. 2. Amount of money you owe and the amount of available credit (30 percent)
The second most important area is your outstanding debt -- how much money you owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered is the total amount of credit you have available. If you have 10 credit cards that each have $10,000 credit limits, that's $100,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk. 3. Length of credit history (15 percent)
The third factor is the length of your credit history. The longer you've had credit -- particularly if it's with the same credit issuers -- the more points you get. 4. Mix of credit (10 percent)
The best scores will have a mix of both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans. 5. New credit applications (10 percent)
The final category is your interest in new credit -- how many credit applications you're filling out. The model compensates for people who are rate shopping for the best mortgage or car loan rates.  
Learn the Credit Terminology Application scoring
The use of a statistical model to objectively evaluate and "score" credit applications and credit bureau data in order to assess likely future performance. Scores help businesses make decisions such as whether to accept or decline the application. Bankruptcy
A proceeding in U.S. Bankruptcy Court that may legally release a person from repaying debts owed. Credit reports normally include bankruptcies for up to 10 years. Charge-off
The balance on a credit obligation that a lender no longer expects to be repaid and writes off as a bad debt. Collection
Attempted recovery of a past-due credit obligation by a collection department or agency. Consumer credit file
A credit bureau record on a given individual. It may include: consumer name, address, Social Security number, credit history, inquiries, collection records, and public records such as bankruptcy filings and tax liens. Credit bureau
A credit reporting agency that is a clearinghouse for information on the credit rating of individuals or firms. Is often called a "credit repository" or a "consumer reporting agency". Credit bureau risk score
A type of credit score based solely on data stored at the major credit bureaus. It offers a snapshot of a consumer's credit risk at a particular point in time, and rates the likelihood that the consumer will repay debts as agreed. Credit history
A record of how a consumer has repaid credit obligations in the past. Credit obligation
An agreement by which a person is legally bound to pay back borrowed money or used credit. Credit report
Information communicated by a credit reporting agency that bears on a consumer's credit standing. Most credit reports include: consumer name, address, credit history, inquiries, collection records, and any public records such as bankruptcy filings and tax liens.
Credit risk
The likelihood that an individual will pay his or her credit obligations as agreed. Borrowers who are more likely to pay as agreed pose less risk to creditors and lenders. Credit score
This term is often used to refer to credit bureau risk scores. It broadly refers to a number generated by a statistical model which is used to objectively evaluate information that pertains to making a credit decision. Debt Consolidation
When you are in serious financial trouble and you're swimming in debt, companies are available, for a fee, that can negotiate with your creditors to lower your interest rates and payments. It is often used as a last-ditch effort to save your credit before considering bankruptcy. Default
A failure to make a loan or debt payment when due. Usually an account is considered to be "in default" after being delinquent for several consecutive 30-day billing cycles. Delinquent
A failure to deliver even the minimum payment on a loan or debt payment on or before the time agreed. Accounts are often referred to as 30, 60, 90 or 120 days delinquent because most lenders have monthly payment cycles. Equal Credit Opportunity Act (ECOA)
Federal legislation that prohibits discrimination in credit. The ECOA originally was enacted in 1974 as Title VII of the Consumer Credit Protection Act. Fair Credit Reporting Act (FCRA)
Federal legislation that promotes the accuracy, confidentiality and proper use of information in the files of every "consumer reporting agency". The FCRA was enacted in 1970. FICO scores
Credit bureau risk scores produced from models developed by Fair Isaac Corporation are commonly known as FICO scores. Fair Isaac credit bureau scores are used by lenders and others to assess the credit risk of prospective borrowers or existing customers, in order to help make credit and marketing decisions. These scores are derived solely from the information available on credit bureau reports. Inquiry
An item on a consumer's credit report that shows that someone with a "permissible purpose" (under FCRA rules) has previously requested a copy of the consumer's report. Fair Isaac credit bureau risk scores take into account only inquiries resulting from a consumer's application for credit, also called a hard inquiry. Installment debt
Debt to be paid at regular times over a specified period. Examples of installment debt include most mortgage and auto loans. Insurance bureau score
An insurance rating based solely on credit bureau data stored at the major credit bureaus. It offers a snapshot of an individual's insurance risk at a particular point in time, and helps insurers evaluate new and renewal auto and homeowner insurance policies. Revolving debt
Debt owed on an account that the borrower can repeatedly use and pay back without having to reapply every time credit is used. Credit cards are the most common type of revolving account. | 
