If you examine the credit score issue closely, its obvious banks act like gangs to help determine who or what entity to lend money to.

Regardless of how you feel about the credit rating system in America, the database helps to determine who gets ahead financially or not.

The most common question online is – what is a good credit score? The right answer would depend on what type of a loan you’re seeking.

The same credit score that gets you a good car loan might not cut it when it comes to best mortgage rates.

Just because you got approved for a furniture or appliance loan, does not mean you have an excellent credit score. First let’s consider:

What is considered a good credit score?

Since you became an adult and started borrowing money, the statistics of how you handled your payments helps to determine your credit score.

The three major agencies have a numerical representation of your on time or late payments, debt ratio in relation to your income, and other small factors to come up your credit score.

The score is famously referred to as the FIFO score, and it’s one of the major factors that help to determine your qualification for a loan, and at what interest rate.

Your FICO number is not listed on your credit report, but can be attached to it if you pay the additional fee. In the beginning of credit scores, the metrics were only shown to lenders and not consumers.

But with major outcry from members of congress and the public, the three major credit bureaus relented.

Your score is a three digit number, and it’s never the same among all the agencies. I have seen major differences in FICO scores among all three credit agencies. The lowest score is 300 and highest is 850.

Just so you know, only 13% of the citizens in the US have credit scores above 800. About 27% have FICO scores between 750 and 800.

Majority of Americans have credit scores between 600 and 725. Unfortunately about 3% of Americans have credits scores below 550, which most lenders consider high risk. In fact, any FICO score below 625 is considered poor risk by most lenders.

The FICO score considered good to excellent, ranges from 700 to 850. If you have a score within that range, you’re not only above average but doing great!

How is a FICO Credit Score Calculated?

While the exact formula used to determine your credit score is hard to come by, inside information has given us enough metrics that we can come up with close enough metrics on how the numbers are derived.

In order to know how to increase your credit score, you must first know the determining factors. The law says that credit scores can only be determined by your financial history and nothing else.

I hope that is true, and adhered to by the bankers because inside information claims certain high net worth zip-codes get better treatment.

Anyway, the fair credit reporting act clearly states that race, age, gender and your place of residence cannot be used to determine your credit score.

What is included are your payment history, how much you currently owe on your credit cards, any satisfied loans, and your factual credit history.

Addition of new credit and how you use credit loans plays a significant role in determining your FICO score.

Here are the main areas of your financial life that contributes to your Credit Score

A – The current balance of all your debt contributes about 30% of the factors to your FICO score. Large debt balances do tend to affect your credit score negatively.

B – The type of credit you carry impacts your credit score 10%. If most of your debts are credit cards and store loans, it will have some bad impact on your score. Mortgages tend to have a positive impact on your FICO score over-time.

C – Any new credit will lower your credit score. If you have few new lines of credit, you’ll experience a lower credit rating.

D – The way you make your payments impacts your score about 35%. Most people with high credit scores have good on-time payment records. Having past due payment or defaulted payment on your file will give you a lower credit score.

E – The longer your credit files exist with positive metrics the better your score will be. As you pay-off loans or mortgages, your FICO score comes with a higher grade.

How to Improve Your Credit Score

There are several steps you can take right now to get your FICO score going in the upward trajectory.

Budget – You need to create a budget for the funds that you have coming into your life. Proper budgeting brings your spending into the correct spectrum for you to better manage your finances.

Please do not keep the figures in your head, write them down for proper references.

While it’s good to use some credit to build up your score, but not making timely payments or borrowing too much would negatively affect your credit profile.

Credit Activity – Some people might not believe this, but not having any credit will impact your credit score negatively. The more activity you show with timely payments, the higher your credit score will be.

Just having a credit card and not using it will lower your score. Credit activity contributes 15% to how your score is calculated.

I am not suggesting you go spending crazy on your credit card, but make sure you use it on a regular basis and make your payments on time.

Make your payments on time – One of the best ways to get a higher credit rating is to make timely payments for all your outstanding balances.

Not only does it affect your credit score, but it helps financial institutions gauge if you can handle new loans.

Timely payment should be mailed out at least 7 to 10 days before the due date, or you can create automatic withdrawals for the best on time payment record.

If you have a few late payments on your credit profile, read this article to see how you can get it removed for a higher FICO score.

How Can a Higher Credit Score Help You?

Everything in your financial life is impacted positively or negatively by your credit score.

Why should you be paying a higher interest rate just because you have a lower score? The banks don’t care and they tend to stick to the data with rigidity.

Past financial performance is used as an indication of future performance.

A higher credit score gives you the ability to dictate terms when it comes to mortgage loans.

I recently received a credit card with a fixed interest rate of only 6% on any outstanding balance.

I have friends with credit cards with rates of about 24% and up. So unless you build up your score, you’ll be subsidizing others with the same type of credit line.

Your attempt to borrow money for any worth-while purpose will be determined by how good your FICO score is.

I was able to raise my score from 650 to 790 within one year, and almost anyone can do the same. We have a unique article that goes into detail about ways to get started.