Your FICO score is one of the most important numbers when it comes to your finances. Whether you’re buying a home, a car or applying for a credit card – lenders want to know the risk they’re taking by lending you money. FICO Scores are the credit scores used by 90% of top lenders to determine your credit risk. Your FICO Scores (you have FICO Scores for each of the 3 major bureaus) can affect how much money a lender will lend you and at what terms (interest rate).
What is the FICO Score
Knowing your credit score and regularly checking it, is the first step to a healthier score. Whether you’re into the hobby or just looking to buy property, you need e good (preferably great) FICO score to get the best deals.
Your FICO score will probably change each month. 83% of the population experiences changes to their FICO Credit Score by up to 20 points month to month. We need this change to be positive, but it takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast.
The best advice for rebuilding credit is to manage it responsibly over time. If you haven’t done that, then you need to repair your credit history before you see credit score improvement.
The five categories that make up a FICO credit score are listed below, but keep in mind that it’s not just a simple equation and the score alone is not the only indicator that lenders look at. It is however one of the most important. Here’s the categories and the percentage of importance to the overall score.
- Payment History – 35%
- Capacity (Amount You Owe) – 30%
- Length of Credit History – 15%
- Types of Credit – 10%
- New Credit Opened – 10%
Payment History – 35%
This category includes payment history information about several different types of accounts such as credit cards, retail accounts and installment loans. Many factors are considered including number of past due items on file, amount past due on delinquent accounts or collection items and severity of delinquency. Most negative information is off (your credit report) after seven years.
Capacity (Amount You Owe) – 30%
The FICO scoring model weighs capacity heavily because it knows that people who go bankrupt charge up their cards to the limits before they file. The FICO model considers three separate components of an individual’s credit when assigning capacity points.
- Installment balances compared to the original loan amounts
- Revolving account balance compared to an individual’s revolving credit limit on an account-by-account basis
- Total revolving account balances compared to an individual’s total revolving limits
Length of Credit History – 15%
Lenders look for borrowers with long credit histories. If you received your first credit card this year, then a second lender will be hesitant to lend you money since there’s not enough information whether you’re a trusted borrower. FICO breaks down “length of credit history” into three pieces:
- How long accounts have been open
- How long specific account types have been open
- How long it’s been since those accounts were used
Types of Credit – 10%
Lenders want to see that you’ve handled different types of loans well, especially the type of loan that they would be extending. So it’s best to have a nice mix of accounts, such as credit cards, mortgages or consumer finance accounts.
New Credit Opened – 10%
While lenders depend mostly on you overall history, they also take a look at your most recent actions.If you’ve had too many hard inquiries due to new credit cards recently, your score will take a hit. Just how much damage does a hard inquiry do? For most people, it amounts to a loss of fewer than five points. But it can vary.
How to Fix Your Credit Score
As I mentioned earlier, there’s no quick fix for your FICO Credit Score. You can’t wake up with a 500 score and decide to push it to 740 in a month or three, or even a year. But overtime you can surely impact your score in a positive way. Here’s a few tips.
- Keep track of your FICO Score – Check your credit score monthly, preferably from all three national credit bureaus (Equifax, Experian and TransUnion) that compete to capture, update and store credit histories on most U.S. consumers. Not only will you stay informed how recent actions have affected your FICO score, but you’ll also be able to see any dubious activity.
- Always pay your bills on time – The biggest influence on your credit score is your payment history. Whether you’ve made your loan payments and done so on time will rise or lower your score more than any other single factor. Even if you can’t make the full payment (which should be your goal to avoid fees), always make the minimum payment on time. That’s enough to keep a perfect payment record.
- Keep you balances low – Know your credit limits and charge no more than 30% of that amount. If you can limit yourself to the single digits that’s even better, as consumers with the best credit scores use just 7% of their revolving credit lines. Pay down higher balances first, then worry about zeroing everything. Also be informed about when you credit card report to credit agencies because that doesn’t always happen when you receive your statement.
- Keep old card open and active – Your old cards are very valuable even if they don’t offer any miles or points. Even if it is a useless cards with a $300 credit limit that you opened in your freshmen year in college. Keep that card open because that will help you average length of accounts.
- Dispute negative reports on your credit – You can check your detailed credit history for free at least once a year for each credit bureau. Look at negative items, such as late payments and dispute any errors that you see or even items that you’re not sure about. The credit bureau will contact the other party and if they do not answer in a timely manner, they will remove the negative item from your credit history.
- Group your inquiries – Whether applying for credit cards, or shopping around for a mortgage, you should group inquiries together if you know you’ll have more than one in a short amount of time. Comparison shop for mortgage and auto loans within a 14-day period of time to minimize the impact of hard inquiries. Apply for the two or three credit cards you want, on the same day.
- Don’t open new cards that you don’t need – This is another obvious tip. If you apply for a new credit card, make sure that benefits outweigh the hit on your FICO score. If you’re into churning, a good rule of thumb is to get at least $500 out of your new application, but you should aim for much more.
To summarize, “fixing” a credit score is more about fixing errors in your credit history (if they exist) and then following the guidelines above to maintain consistent, good credit history. Raising your scores after a poor mark on your report or building credit for the first time will take patience and discipline.
What is a good FICO Score
FICO scores range from 300 to 850. Anything over 740 is very good and everything over 800 is excellent. Last time I checked I’m at 790, so I can’t complain. The national distribution of credit scores is as follows:
- 800 & Above 13%
- 750 – 799 27%
- 700 – 749 18%
- 650 – 699 15%
- 600 – 649 12%
- 550 – 599 8%
- 500 – 549 5%
- Up to 499 2%
Some of the best credit cards–from rewards cards to 0% balance transfer offers–go to consumers with strong credit scores. A good credit score can also get you a lower interest rate when you borrow. That means you will pay less over time. So improve your score, and you’ll profit financially in the long run.