Credit and the use of a FICO score to measure credit worthiness are in use today by more than just banks. Insurance companies, landlords, and potential employers are just a few of the businesses that inquire, review, and judge your credit report.
Building a high FICO score is imperative to saving thousands of dollars in accrued interest over several years.
Consumers often approach Bank of Internet with 2 main questions:
1) What is my credit score?
2) Why is the banks score different that what I received from the credit bureau?
What is my credit score?
This question is usually coupled with an inquiry as to what makes up a credit score. Starting at the high level basics, your credit scores is derived from your payment history, outstanding debt, time on the credit bureau, new credit acquired, and mix or types of credit secured.
More specifically, the better and longer you pay your bills, the better your score. Keep in mind that companies such as utility and professional services (Dentist, Doctor) may place a collection on your credit bureau for non-payment of a bill. Overall, pay your bills on time and your credit score will continue to increase with time.
5 years of prompt payments is a good guideline to use when determining how your score will increase. Over 10 years of unblemished credit is better, and 15 years better yet.
Acquiring recent credit will cause your score to drop as this may be an indicator of potential future credit abuse. Of great importance is your revolving debt utilization (i.e. credit cards). Keeping your balances low greatly increases your credit score. Generally speaking, you want 90%+ of your available credit limits at your disposal to use. For example; if you have 3 credit cards with a combined credit limit of $10,000, to maximize your credit score, keep your combined balances below $1,000. Subsequently, even if you have paid your debt perfectly for several years, using the same example, if your combined credit card debt was at 90% of the available balance, or $9,000, your score would be greatly reduced. This also answers the age old question of; should you close credit card accounts? No, as long as there are no fees associated with the account, keeping the account open with no balance increases your score.
Why is the banks score different that what I received from the credit bureau?
Lastly, people often order their credit report online through one of the 3 national repositories (Experian, Trans Union, or Equifax) or through a credit reporting agencies; AKA reseller of credit bureaus. Often, the consumer will purchase a score specific to measure credit worthiness, but NOT the same score the banks use. Purchase a FICO based score ranging from 350 to 850 to match what the banks use.
In summary, to increase your credit score is to use common sense. Pay your bills on time, do not over extend yourself in debt, do not accumulate debt too quickly, and keep your credit card balances below 10% of the available credit limit and you should be in the 700+ score range.