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Learning the ABCs of FICO

Most people don’t think too much about their FICO scores until they want to get a loan. No matter the type of loan you want—mortgage, new car—the higher your FICO score, the more likely you’ll be approved.

Understanding the five factors that make up your scores can be the first step toward improving them. Financial experts at the Motley Fool break down where your scores come from and suggest a few ways to improve them.

Know Where Your FICO Score Comes From

Payment History – Thirty-five percent of your score is determined by whether you pay your bills on time every month.

Credit Utilization Ratio – Thirty percent reflects your credit utilization ratio—the percentage of available credit you’re using. Using less than 30 percent of your available credit can help your credit score.

Length of Credit History – Fifteen percent reflects the length of your credit history. Paying bills consistently over time can definitely work in your favor.

New Accounts – Ten percent of your score is based on the number of accounts you open. Opening too many new accounts simultaneously suggests you’re highly reliant on borrowing to keep up with your expenses.

Credit Mix – Ten percent reflects the types of accounts you have. Credit bureaus make a distinction between your credit card accounts versus student loans, car loans, and mortgages.

Three Ways to Improve Your FICO

Pay off a chunk of your balance. If you carry a balance, pay off as much as you can, even if it means you must work a second job or sell off stuff you no longer need or use.

Ask for a raise in credit limit. If you’ve paid your bills consistently, this may not be difficult to get—and since your credit utilization ratio carries significant weight, that should help to improve your overall score.

Correct reporting errors. It’s estimated that 20 percent of credit reports contain errors. If you spot one on yours—such as an error in the amount you owe or a paid-off account not shown—getting it corrected will almost certainly boost your score. Review your FICO score for free once each year to make sure it’s accurate.

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