- Rose Kennedy For the AJC
With the 2017 hacking of credit bureau Equifax, credit scores have been in the spotlight recently. But credit scores are important every day for adults who earn or borrow money, especially the FICO score, which is used by 90 of the top 100 largest U.S. financial institutions.
Just what is a FICO score? The short answer: the global standard for measuring credit risk in the banking, mortgage, credit card, auto and retail industries, created by Fair Isaac Corporation. The average adult has FICO scores from each of the three main credit bureaus: Equifax, TransUnion and Experian. FICO scores are based on amounts owed (30 percent), new credit (10 percent), length of credit history (15 percent), payment history (35 percent) and credit mix (10 percent).
A low FICO score might contribute to a lender's decision to deny you credit and could increase the cost of an auto loan by almost $5,000, according to Consumer Reports. A high FICO can save you thousands annually on everything from reduced credit card interest to the size of the deposit you must pay for electric utility service.
Request one free credit report from a different reporting agency every four months through AnnualCreditReport.com and check for errors, according to Consumer Reports. If you find an error, dispute it with the credit bureau. Pay particular attention to make sure no one has incorrectly listed a late payment on any of your accounts or miscalculated amounts owed on any open accounts. "Hard pull" credit inquiries, which are made by potential lenders with your permission, can lower your FICO score slightly, but this is different. When you check on your own credit, there's no penalty.
According to myFICO.com, so-called "quick fix" efforts to repair your credit history are the most likely to backfire, so consumers should be leery of any advertisements or credit counselors claiming they can improve your credit score fast. Depending on the reason for a low score, you may need 12 to 24 months before any efforts (except for error corrections) start showing on your score. You can accelerate the improvement by enrolling in a debt-management program and making payments on time, but there's no instant fix.
Even if you are only missing payments by a few days, delinquent payments can seriously damage your FICO scores, particularly since you can't fix previous missed or late payments. If you have missed payments, get current and stay current so you can demonstrate that the problem is in the past. Accoding to myFICO, older credit problems count for less and will fade as your new on-time payment pattern starts showing up on your credit report. Some older versions of FICO keep collection accounts on your credit report for up to seven years even if they're paid off, but the most current versions of FICO ignore any collections when the balance is zero, according to Consumer Reports.
The "amounts owed" category makes up 30 percent to your FICO score calculation. Unlike payment history, you can address it immediately, but you'll need financial discipline: "The most effective way to improve your credit scores in this area is by paying down your revolving–credit card–debt." Don't close unused credit cards as a short-term plan to up your scores, since it may just increase the percentage of available credit you are using - a no-no for high credit scores. The same goes for opening a new credit cards you don't need: while it will increase your available credit, it could negatively impact the average age of your credit accounts and damage your FICO scores.
When you apply for multiple credit cards at the same time, you generate several "hard pull" requests for your credit history, which can hurt your FICO score, according to Consumer Reports. This advice only holds true for credit cards, not house, car or student loans.
MyFICO also reminds consumers that while FICO scores are important, they're not the be-all and end-all. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you even if your score is low - or decline your request for credit even though your score is high.
To get started improving your FICO score, access myFICO's estimator tool, which helps you approximate your score range without any identifying information. It also offers a direct link that allows you to file an online credit report dispute and gives more detailed answers to the question "What is FICO?"