To secure the best possible financial future, it is important that we present ourselves as responsible consumers to potential lenders. One of the ways in which we can do this is to become familiar with what our FICO credit score is, what it reveals about us, and how we can improve it.

Beginning in the mid 1950's, The Fair, Isaac and Company (FICO) began developing a system for calculating an individual's credit risk that would allow lenders to assess that risk in a more timely and objective fashion than had previously been employed. This scoring is derived by an algorithm that weighs and balances the many components of your past credit history--both the positive and the negative--and assigns a number to the result. This number is called the FICO credit score and it is used by lenders to predict the likelihood that the borrower will pay off a loan.

There are major 3 major credit reporting agencies that compile credit scores similar to the FICO credit score. Equifax uses the BEACON credit score, Experian employs the Fair Isaac Risk Score (FICO) and TransUnion's version is called the EMPIRICA credit score. Each of these three bureaus compile their own information based on the data they have available to them so therefore the results may vary slightly, but should generally be similar.

Since the idea of credit scoring is to provide a financial portrait at any given time, keep in mind that your credit scores change with each transaction, and may increase or decrease monthly depending on your spending or payment trends.

What the Scores mean

The credit scoring result is just one factor in determining who be an acceptable applicant. Each lender has its own criteria and acceptable scoring level that qualifies the borrower for a loan. Often lenders choose to accept lower credit scores at higher interest rates and reserve the better rates for those with higher credit scores. Therefore knowing your credit score can benefit you as it may put you in a position to negotiate for a better interest rate.

The FICO credit score is a three digit number ranging between 300 and 850. The average American scores around 700. Since your reporting score is based on your credit history and can only be improved with time, it is wise to consider carefully each financial move and how it will affect your credit scores. Remember that your negative credit history is weighed against your positive history so that even if you have good credit, it may not have been established long enough to accurately predict how you will handle the payment of a larger loan. The following actions will bring your scores down and reflect poorly on your reliability as a borrower;

• History of late payments by over 30 days or bad debts.
• Collections.
• Maxed out credit cards or cards that carry a balance that amounts to more than 80% of your high credit limit.
• Number of balances carried
• Number of new accounts opened in the last year
• Too many inquires into your credit report over a short period of time

How do I find out my score?

You can and should find out your FICO credit score yearly to keep informed about your credit history and to check for errors or fraud. You can purchase just your FICO score, but it is recommended that you obtain your credit report online along with your credit scores from all 3 of the major credit report agencies.

Depending on your circumstances you may qualify to obtain this information for free in any of the following circumstances;

• If you are a resident of Colorado, Georgia, Maryland, Massachusetts, New Jersey or Vermont.
• You're receiving public assistance.
• You're unemployed and planning to apply for a job within 60 days.
• You believe that your file contains errors due to fraud.

You may also qualify for a totally free credit report if you have been denied credit. The Fair Credit Reporting Act states that the lender is required to give you the reasons why your credit score wasn't high enough to qualify and if you have been denied credit within the last 60 days, the lender must give the name of the credit bureau that issued the report.

How do I increase my credit score?

Generally speaking, credit scores can only be increased over time, through regular payment of bills and loans; however there are things you can do now to help speed the process. Some examples are;

• Examine the balances on your credit cards and work to lower the ones that are above 80% of their maximum credit limit.
• Limit yourself to just a few credit cards and use them responsibly. Credit Cards that have been in your possession for longer than 12 months reflect better on your credit scores.
• Pay bills on time.
• Apply for credit only as needed. Too many inquiries on your report over a relatively short period of time can make lenders assume you are being turned down often or are a habitual spender.
• Obtain your credit report yearly and correct any errors.
• Examine your credit report for inactive accounts such as department store cards you no longer use. Contact the finance department to have the account closed and when you do so, request a letter stating that the account was closed by customer request.

By taking these steps to safeguard your credit history, in time you can increase your scoring and put yourself in a more favorable position to obtain better credit rates, thus securing a positive financial future.

About the Author:

Melanie Cossey is a successful freelance writer. Melanie writes many informative and educational articles on the topic of credit and including how to obtain a totally free credit report online. Some of her article include: Comprehending a Credit Report and Reducing Debt Through Lower Interest Loans