In the search 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. 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) and determine available financing given an individual’s credit riskiness.
The more likely you are to pay a loan back, in full and on time, the lower the interest rate you’ll be charged. The lower your interest rate, the less you pay to borrow money. 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.)
What makes up a FICO score?
- Payment History (35%)– Have you paid your bills on time?
- 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%. Agencies advise individuals to use 20% or less of their available credit.
- Length Of History (15%)– What’s the average age of your accounts?
- 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%)– Car Loan, Student Loan, Mortgage, Credit Cards, Retail Accounts
How can you improve your credit score?
- Check your credit report– 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.
- Make timely payments– as this has the most significant impact on your credit score,set up automatic payments or mark payments dates in your calendar if you’re one to forget!
- Request a credit line increase– by increasing your credit lines, you can decrease your utilization ratio. Be sure not to request an 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 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 credit worthiness. By making timely payments, and taking on only the debt that you can handle, your credit score will increase over time.
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 isn’t ideal, don’t fret – consistent bill payments and responsible management of your finances can improve it over time.