You know that your credit score should be “good,” but do you know what it takes to get it there? There are different formulas used to calculate credit scores, but the most commonly used one comes from Fair Isaac Corporation (FICO). Your FICO® score is calculated from a variety of different credit data that reflect how much of a risk lenders would take by lending you money. A high score can mean a better rate when you’re making a big purchase like a car or home, and it will impact credit cards you can qualify for. A low score, however, can make your financial life one of denials and high rates.
What is a FICO score?
All of the financial data that goes into calculating your FICO score can be broken into five groups:
- Payment history: Have you made payments to credit accounts on time?
- Amounts owed: What is the ratio of the amount you owe to the amount of credit you have available?
- Length of credit history: How long have you been using credit (responsibly or irresponsibly)?
- Credit mix: Do you have credit cards, retail accounts, loans, a mortgage?
- New credit: Have you opened more than one credit account within a short period of time?
What damages and improves your score is more or less financial common sense. Late payment? Your score will go down. Make progress paying down your debts? Your score will go up!
What’s in a number?
FICO scores range from 300 to 850, and go up and down based on the behaviors described above. They are typically broken down into the following categories:
- < 600: Below average credit
- 630-689: Average credit
- 690-719: Good credit
- 720-850: Excellent credit
My FICO score is low, what do I do?
If you find that your FICO score isn’t what it could be, consider the following:
- First off, remember that to earn a good credit score, you need to use credit and use it responsibly. This means opening a line of credit.
- Keep your balances low. One aspect of the credit score calculation is existing debt compared to available credit (amounts owed). While it’s tempting to spend to the maximum amount of credit you have, that’s a habit that will lower your credit score. Maxing out a credit card could deduct 45 points or more from your score, even if it’s a small amount. It’s better to have used $500 on a $1,500-limit card than $299 on a $300 card.
- That being said, think twice before closing the account if you’ve paid a card off. Owing zero dollars on an available line of credit will boost your score!
- Pay on time. Late payments will count against your score, so sign up for auto-pay if it’s an option to make sure you don’t miss anything.
- Keep an eye on bills. If it’s something that you don’t pay regularly — a car repair or a hospital visit — make sure you receive and pay the bill. If you miss a payment or the bill gets taken to collections, you’ll see a dip in your credit score.
Knowledge of your FICO score is power! The Fair Credit Reporting Act allows consumers to request a free copy of their credit report — which includes your FICO score — from each of the three major credit reporting agencies once a year (Equifax, Experian and Trans Union). You can get your annual report at www.annualcreditreport.com or by calling 1-877-322-8228. In addition, Fair Isaac Corporation provides a great intro to FICO basics at www.myfico.com.
Once you know your current FICO score, check it regularly. That way, you’ll be able to catch mistakes, notice any evidence of identity theft/fraud and stay motivated to keep that score high!