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.
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.