Anyone planning to buy a car, a house or any other major purchase ought to know his or her FICO score. Your score not only affects your ability to obtain personal loans and mortgages, but it also affects the interest rate you pay. According to consumer reports, borrowers with FICO scores of 720 or higher are likely to receive interest rates up to four percentage points lower than those with scores under 640. The FICO score is widely used in the mortgage, auto loan, and credit card industry.

Fair Isaac Co. is the creator and owner of the score, hence the name FICO (the company was founded by a couple of mathematicians back in the 1950s). Well, the firm has just created a new score designed to predict credit risk for individuals with little or no credit history. The FICO expansion score draws on information from an array of small credit reporting agencies outside the realm of the three major credit bureaus. Equifax, Experian, and Trans Union. The new scoring system will look to payday loan companies, rent-to-own stores, apartment rentals, utility bills, cable TV and telephone bill records, and banking history as it relates to information on abuse of overdraft protection on checking accounts.

According to financial advisors, the new FICO score is likely to benefit recent immigrants to the United States, college students, new divorcees and widows, first-time home buyers, and low-income individuals. Those who are just starting out in their career and have not yet hand many dealings with banking institutions are also likely to benefit.

What is the difference between a credit report and a credit score?

Your credit report is a summary of your past and present accounts, including credit cards, bank credit lines, mortgages, department store charge cards and other bills (usually excluding rent payments or utilities). A credit report will note any collection actions taken against you, as well as any information in the public record, such as liens or bankruptcy proceedings. Credit reports include everything: charge-offs, bad debts and late payments for a seven-year period.

Your credit score is a three-digit number used to predict how risky it is to extend credit to someone. It ranges between 300 and 850 and is based on calculations from such factors as the number of late payments you’ve had that were over 30, 60 or 90 days. It also takes into account the number of credit accounts you have, the years they were opened and which ones have open balances and which ones are closed. FICO scores also consider total debt outstanding and the total amount of credit available. Your credit history is compared to those of millions other consumers.

You can get a copy of your FICO score for $12.95 at myfico.com. You can also see your percentile rank, i.e., the percentage of the general population that has a lower credit score than you, as well as the distribution of scores and the percentage of the population that falls within each range of scores. Moreover, you will be given the top four reasons why your score was not higher.

The new FICO score will run from 150 to 950 with higher scores signifying lower risks of payment defaults to mortgage lenders. In essence, it looks at the likelihood that you will become severely delinquent (90 days or more paying on a credit account). For those folk who have charge-offs or poor payment history, the new FICO won't offer any relief or a clean slate.

Still, you can take steps to improve your credit score. For starters, you will want to concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt.

Pay your bills on time:
Payment history is a significant factor. Your score will be affected negatively if you have been late, had account referral collections, or declared bankruptcy. Anything more than 30 days late will hurt you. Never let a payment of any kind, even a telephone or utility bill, get 90 days past due. Late payments can have an impact on your ability to get a favorable interest rate or future credit. Besides, you don't want to get zapped with late fees, which eat away at your disposable income.

Monitor your debt ratio:
Try to keep the amount borrowed on your credit cards under 35% of the credit limit. Anything higher is likely to have a negative affect on your score. According to debt counseling experts, if your debt-to-income ratio (excluding mortgage or rent) is 15% or less, you are doing a good job of keeping your debt at a manageable level. Around 21% to 39%, you need to start looking at eliminating credit card balances with high interest rates. Above 40% is a serious situation that may demand you seek outside help from groups such as the National Federation for Credit Counseling.

Pay more than the minimum due:
Credit card companies are the only ones who benefit from minimum payments, since you are really just paying off the interest charged and not so much the principal (amount). Don't carry large balances from month to month. Carrying hefty credit card balances can be detrimental to your financial well being and your credit score. Moreover, paying more than the minimum due will help accelerate your debt payments and move you closer to becoming debt-free.

Maintain clean active accounts:
The number and types of credit accounts you have open is also significant. If you have open charge accounts that were established several years ago but have little or no outstanding balances on them, then that is actually a plus. Having clean, active charge accounts will boost your credit score. Also, it is not always necessary to close out or cancel your credit cards. Just stop using them. To improve you credit score try to keep five open accounts, including your mortgage, car note, credit cards, etc. No loans from finances companies though since they don't bode well for your score. The length of your credit history is also a factor. Having only a few credit lines open shorter than six months could impact your credit score or negatively influence a lender's decision.

Don't apply for too much new credit:
Applying for many new credit lines will negatively affect your score. Too many means two or more a week. Each can shave up to 6 points from your overall credit score. Inquiries by creditors monitoring your account or looking at credit reports to make prescreened credit offers don't count. Multiple requests for your credit report (not including ones made by you) will lower your credit score. Assume that every time you give your Social Security number to a lender or credit card company, it will order a credit report. Be careful when doing loan searches on the Internet since this could result in multiple inquiries. Unfortunately, credit report agencies treat these as a rapid string of inquiries instead of just one inquiry.

Be mindful that bad debts don't disappear from your credit once they have been paid in full. However, it won't take you seven years to improve your credit score. Recent entries on your credit score carry more weight than earlier ones. Just always remember that maintaining good credit is not a one-shot deal but an ongoing process.