If you want the best finance rates possible, you need a good FICO score. Understanding what this score represents and which elements of your credit history affect it, makes it easier to assess your financial situation and take the steps necessary to make yourself a more appealing prospect for lenders.
You can check your credit score for free on Bankrate.
What is a FICO score?
The Fair Isaac Corp. created the FICO credit score as a way to assess credit risk. The score takes into account various elements of your credit history to determine if it’s wise for a company to extend credit. A high score represents a robust credit history, meaning lenders and insurers are more likely to offer credit.
What is a good FICO score?
FICO scores range from 300 to 850:
- 800+ is exceptional.
- 740 to 799 is very good.
- 670 to 739 is good and represents the median credit score range.
- 580 to 669 is below average.
- 579 or less is poor.
See where you credit score stands. Check it for free on Bankrate.
How is your FICO score calculated?
Understanding how the Fair Isaac Corp. calculates FICO scores makes it easier to adapt your lifestyle to improve your own score. The score comprises five main components derived from your credit history, and each component contributes an amount to the total based on its importance:
- Payment history: 35 percent.
- Amount of debt: 30 percent.
- Length of credit history: 15 percent.
- New credit: 10 percent.
- Credit mix: 10 percent.
Your payment history factor derives from your ability to pay credit accounts on time. This is the most important factor, as lenders need to know that you settle your debts in a timely manner.
Amount of debt
Your amount of debt represents the amount of money owed. A lot of debt does not necessarily mean you have a low credit score, as the value takes into account the amount of credit available as well as the amount owed. For example, if you have maxed out a $5,000 credit card, your FICO score may be lower than someone who owes in excess of $20,000, but is still well within their credit limit.
Get your credit report and score for free today on Bankrate.
Length of credit history
Longer credit histories usually increase your credit score. The score considers how long you have had your credit accounts and how long it has been since you used certain accounts.
Opening several credit accounts in a short period indicates you are a greater risk for lenders. This is particularly true if you don’t have a long credit history.
The mix of credit types you use also impacts your score. This considers credit cards, retail accounts, finance company account and mortgages.
How to find out your FICO score
The Fair Isaac Corp.’s myFICO website offers a free FICO estimator. By accurately completing a series of questions regarding your financial history, it’s possible to determine an estimate of what your current score is.
Additionally, many financial institutions are part of the FICO Score Open Access program, which allows the institutions to offer customers free access to their FICO scores.
How to improve your FICO score
Your FICO score isn’t static, and you have the power to improve it. Start by checking your current score, and then identify areas in your life that may have negative impacts. Useful ways to improve the situation include:
- Pay bills on time. Paying even a few days late has an impact, so set up payment reminders and settle accounts as soon as they are due.
- Keep your balance low on credit cards.
- Pay off debts rather than moving them. Owing an amount of money on a single account is often better than owing the same amount across several accounts.
- Don’t open new credit accounts until you need them. Opening several accounts in a short period often lowers your credit score.
FICO scores are the most commonly used credit scores throughout America. Your score determines how much you can borrow, and what rates you can get. So, whether you are buying a new car or taking out a credit card, it pays to have a strong FICO score.
Remember that your FICO score is a snapshot, with the potential to change. Take the necessary steps to improve your credit score now, and reap the benefits when you need them.