What's the truth about bad credit scores? You can alter them, even when your access to credit is limited.

You may never understand the quadratic formula, and you may never know why your car starts when you turn the key. But you can learn how your credit score is calculated and what actions you can take to improve it.

The number that makes the world go 'round

Your FICO credit score says a lot about you. It boils down seven years worth of documented credit history into one simple number that's supposed to represent how likely you are to repay your debts as promised. The credit score number, which can range from 300 to 850, plays a large role in the rate of interest that you'll pay on a variety of loans, including those for cars, mortgages, and credit cards. Basically, when you have bad credit issues, your FICO score will be low, and your interest rate will be high.

What makes FICO tick?

The FICO credit score is based largely on your payment history. Consistently paying your accounts on time bolsters your FICO, while late payments and collection problems push it down. The length of time that your accounts remain past due is considered, as is the number of accounts that are in default. If your payment problems are recent, it will have a sharper impact on your credit score.

The second most important factor is the amount that you owe on your credit accounts. The scoring formula looks at how the amounts you owe are distributed among different debt types, and how many of your accounts have outstanding balances. Maxing out all of your available credit pushes your FICO score down, but having lots of available credit pushes it up.

To a lesser degree, the FICO calculation incorporates data regarding the length of your credit history, new accounts opened, and the types of credit used. A rash of new openings in a short period of time, for example, is a red flag, while a lengthy and robust credit history shows financial stability.

Improving your score

Often, a bad credit score can result from having insufficient information in your report. To overcome this situation, obtain a gas or secured credit card. Then, charge small amounts, and pay them off in two or three months. Keep your balance well below your actual credit limit.

A different approach is required if your low score is caused by past due amounts on your existing accounts. In this case, you'll want to use your existing accounts to establish a pattern of regular, on-time debt payments. Your score will improve as those past dues fall further and further into the past.

Managing your FICO is actually much simpler than using the quadratic formula or replacing the ignition in your car. It does take discipline, but eventually, current bad credit borrowers will be rewarded with lower interest rates and larger credit lines.

Published on June 21, 2007