A MOMENT OF CLARITY
What’s My FICO Credit Score and How Can I Improve it?
If you are applying for a new credit card, car loan or home equity loan, you may find yourself at the mercy of the Fair Isaac Corporation, creators of the FICO credit score. After seeing your score is 570, 680, 720 or 830 – what does this number actually mean? How is it calculated and how can you improve it?
What is a FICO credit score and what does it represent?
A credit score is a numerical representation of a person’s creditworthiness, which helps determine one’s ability to access credit and at what interest rate. FICO scores are the most widely used credit reports that calculate a person’s credit risk, or how likely they are to miss a bill payment or default on a loan. Scores range from 300 (poor) to 850 (excellent).
What does a credit score mean?
The higher the credit score, the more creditworthy a person is. The more likely a person is to pay a loan back, in full and on time, the more willing creditors will be to loan them money. In the case of debt, risk is expressed through interest rates. As the adage goes, “more risk, more reward.” The riskier the borrower is, the higher the interest rate they will be charged to borrow money. The creditor is compensated for the additional risk they are taking in lending to a person with a low credit score and increased potential for default (not paying their loan back). The more a creditor trusts a borrower, the lower interest rate they will be charged. The lower your interest rate, the less you pay to borrow money.
What makes up a FICO credit score?
Payment History (35%)
- Have you paid your bills on time and in full?
Amount Owed (30%)
- How much have you been borrowing? What percentage of your credit (aka utilization ratio) have you been using?
- By using $400 of your $2,000 monthly credit limit, you have a utilization rate of 20%. Credit agencies generally advise individuals to use 20% or less of their available credit.
Length Of History (15%)
- What’s the average age of your accounts? The longer the history, the better.
New Credit (10%)
- How often are you opening a new line of credit or increasing your credit limit? Each new line or increase in your credit limit counts as an “inquiry.” The more inquiries you have in a short time period, the more negatively your credit score will be impacted.
Types of Credit Used (10%)
- Examples include a Car Loan, Student Loan, Mortgage, Credit Cards, Retail Accounts
- A mix of different credit types will enhance your overall score
How can I improve my credit score? 6 Key Considerations
- Check your credit report: Periodically check for errors, delinquent items, and an overview of what accounts have been taken into consideration in generating your FICO score. If there are any errors, you can dispute them with the credit bureau. You are eligible to receive a free copy of your credit report every 12 months from each credit reporting company (Experian, TransUnion and Equifax) at com.
- Make timely payments: As this has the most significant impact on your credit score, set up automatic payments or mark payment dates in your calendar.
- Request a credit line increase: By increasing your credit lines, you can decrease your utilization ratio. Be sure not to request a credit increase too frequently, as this can have a negative effect on your aforementioned inquiries.
- Charge less: Simply lower your utilization ratio by using less of your available credit.
- Pay down debts: If you have any outstanding debt, be sure to pay down those items in a timely manner before taking on additional debt.
- Patience: Increasing your credit score takes time and the score itself is merely a snapshot of your current creditworthiness. By making timely payments and taking on only the debt that you can handle, your credit score will increase over time.
FICO scores have sped up the processing of loan applications and create a fairer process that effectively compares the credit risk of individuals without bias. (FICO scores do not consider age, ethnicity, work history, current income, or place of residence in their calculations.) This objective tool has become vital to our financial system.
In addition to your phone number, social security number, and your significant other’s birthday, another important number to remember is your credit score. If your score is not ideal, don’t fret – consistent bill payments and responsible financial management can improve it over time.