FICO is the acronym for Fair Isaac Corporation, a publicly-traded corporation that created the best-known and most widely used credit score model in the United States. The FICO score is calculated statistically, with information from a consumer's credit files. FICO scores range from 300-850 with the higher being best. The FICO score is primarily used in credit decisions made by banks and other providers of secured and unsecured credit. It is used to represent the creditworthiness of a person and the likelihood that the person will pay his or her debts.

Lenders want to know the risk they are taking by giving you credit whether you are buying a car, a home, or applying for a credit card. The FICO score is used by most lenders to determine your credit risk. You have one score from each of the three major credit bureaus (Experian, Equifax, and Transunion). It can affect how much money a lender will lend and at what interest rate. Taking steps to improve your FICO score can help you qualify for better rates from lenders in turn saving you thousands of dollars.

It is important to have a good FICO score. With a low FICO score it ends up costing you more money then necessary. For example, car insurance companies run your credit score and rates depend on your score. The lower the score the higher the auto insurance rates are. Credit card companies periodically run your credit, and a lower score may cause an interest rate hike. Higher interest rates mean higher payments to the credit card companies. My advice is to manage your credit responsibly.

Paying your bills on time will increase your FICO score. Late payments, delinquency, and collections can have a damaging impact on your FICO score. If you have missed any payments, you need to get current as soon as possible and stay current. The longer the history of paying your bills on time, the better your credit score will be. Paying off a collection account will still stay on your credit for typically seven years. So do not be fooled that a payoff of a collection account will disappear from your credit history. The payoff will help your score in the long run.

Your balances should be kept low on credit cards and revolving credit. High outstanding debt will lower your FICO score. An effective way to improve your credit score is to pay down your revolving credit. A way to eliminate your credit cards one at a time is to pay off the highest interest rate card first. Whatever you do, do not close unused credit cards as this will raise your score. What happens is you have outstanding debt versus available credit. By closing an account, your available credit decreases, in turn decreasing your score.

Do not open a lot of new accounts too rapidly. New accounts lower your average account age, in turn having a larger negative effect on your score, due to not having a lot of other credit information. Opening multiple accounts can appear risky to a new credit user. Apply for and open new credit accounts only as needed.

It is important to re-establish your credit history if you have had problems in the past. You can open new accounts responsibly and pay them off monthly and on time which will help in raising your credit score. It is ok to check your own credit report, as this does not lower your credit score. You should check your credit yearly and it is free. The website is www.annualcreditreport.com and it pulls your credit for Experian, Equifax, and Transunion. You can pay a small fee to include your FICO score with the report.

By improving your FICO score you save yourself money.

Currently, Stacey L. Morin works for Wilshire Associates Inc. in their Private Equity Division as Assistant Controller and holds a Masters of Business Administration in Finance from California State University Northridge and Bachelors of Business Administration in Accounting from Eastern Michigan University. Ms. Morin is a Freelance Business Consultant Writer on the side.

By Stacey L. Morin, MBA-Finance, June 2008