Understanding Your FICO Score

Nico Leyva writes for Nerdwallet, a consumer finance website that promotes financial literacy and looks for the best ways to save you money.

What is a FICO score and what does it mean for you? Let’s start with the basics. It’s a number between 300 and 850 that registers your credit risk. The score is based entirely on your credit report, which contains your identity, credit accounts, credit inquiries in the past two years, and information from public records and collections. There are three major credit reporting bureaus that lenders report to in the US: Equifax, Experian and TransUnion. FICO’s score system is the standard credit rating system in the US, and is used by financial institutions to determine the type of service you will receive. Lower FICO scores usually mean credit cards or loans will either not be available to you, or will carry higher interest rates and fees. Higher FICO scores allow for greater options, more rewards and lower interest rates on loans and credit cards.

What Goes Into Your FICO Score

That little number carries a lot of power. FICO has kept its exact scoring model a secret, but the company has released a set of factors, and their individual weight, that contribute to your overall score. The factors are derived entirely from your credit report, so the importance of each may differ from person to person.

  1. Payment history (35%) – Late payments, missed payments, being sent to collections, or any other negative credit event will cause your FICO score to fall. On the same token, if you pay your bills or loan installments on time, it will rise. FICO takes into account how many negative events you have, how long credit accounts have been negative, and how severe the event is.
  2. Amounts owed (30%) – Debt versus credit limit. If you owe a majority of your credit balance, that is going to negatively affect your score. If you have several loan or credit card accounts with amounts owed, that will also negatively affect your score, as you will be seen at risk of overextending yourself. FICO takes into account revolving debt (credit cards), installment debt (fixed loans) and open debt (“pay in full” products).
  3. Length of credit history (15%) – Typically, the longer your credit history, the better your score, but this is not always the case. Also important is the average age of credit accounts, both open and closed.
  4. Types of credit in use (10%) – Your credit combination. FICO looks at your specific recipe of credit cards, mortgages, personal loans and other accounts, and how effectively you are using them. Good credit card payment and installment loan histories improve your score. If you have limited credit diversity, that can be detrimental to your score.
  5. New credit (10%) – Opening several new credit accounts in a short time will paint you as risky. The number of credit inquiries made by lenders is noted in your credit report, and if you have several in a short period of time, that can make lenders wary.

Improve Your FICO Score

In terms of general trends, a score of 300 – 579 means you have bad credit. 580 – 629 means you have poor credit. 630 – 689 indicates fair credit. 690 – 749 is good credit, and 750 – 850 is excellent credit. Poor to fair credit scores can be improved by paying bills on time, keeping the amount you owe relatively low and minimizing the amount of credit accounts you have. The ideal way to obtain good credit is to find a mixture of installment loans and credit cards, and use them successfully. If you have very bad credit, it can be tough to find credit sources. A simple way to build funds is to maintain a savings account, and you can start to improve your score with poor-credit options like a secured credit card. And remember, your FICO score is not permanent. Good payment behavior will always boost your number.

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