Your FICO® Score provides a quick snapshot of your overall credit health. FICO stands for Fair Isaac Corporation, the founder of the scoring system. The FICO Score is the most used credit score system by lenders. It helps institutions assess how likely you are to repay debt. It can determine whether you get financial assistance and how much the lender will charge you in interest.
Your score will range between 300 and 850. The higher the score, the better you’ll look in the eyes of lenders. You should always shoot for a high score. But first, you need to know what to watch out for.
What are the different levels of FICO Scores?
With a broad range of 300 to 850, how do you know what is a good, or even an excellent FICO Score? The optimal score will differ between lenders. Some lenders specialize in offering credit to those with less than perfect credit, while others accept nothing less than excellent credit.
Once you know your score, you can use the following scale as a general guide to see how lenders view your credit in terms of risk:
- Over 800: Very low risk
- 740–799: Low risk
- 670-739: Average risk
- 580-669: High risk
- Under 580: Very high risk
No matter what your score is now, you shouldn’t just check it and forget it. It will change many times throughout your life.
What influences a FICO Score?
Your FICO Score pulls information from your credit report. This includes both good and bad history.
According to the Fair Isaac Corporation, your score is typically calculated using the following factors:
- Payment history (35%)
- Outstanding debt (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
These categories aren’t all equally weighted. Some may factor less into the overall score depending on your unique situation. For example, those with little or no credit history will be factored differently than those with an established credit history.
In addition, certain financial hardships may affect your score for a long period of time. If you cannot afford to pay your bills and have delinquent reporting history, that can impact your score for a long time.
The good news is that if you have circumstances that cause your score to drop, you can start working to improve your score today. Here are a few steps to start building your credit history:
- Apply for a credit card with a manageable credit limit
- Pay at least your minimum payment by the due date each month
- Keep your balance low relative to the credit limit
There’s no quick fix, and each person’s credit situation is different. But always making on-time payments with all your obligations and keeping your balances low relative to your credit limits are two of the most important things you can do to positively affect your credit history.
Why should I keep track of my FICO Score?
Your FICO Score can affect many areas of your life, from your ability to find housing to acquiring financing for a vehicle.
Some financial institutions send customers their FICO Score for free on their monthly statements. First PREMIER Bank credit card customers receive an updated score from TransUnion on a quarterly basis. Tracking this may benefit you in many ways.
Get affordable housing
When you apply to rent an apartment or home, property management companies often pull your credit score with your permission. This could impact how much they request you to pay for a deposit or rent up front, or even if they’ll rent to you at all. If your score is less than favorable, it’s helpful to know your score ahead of time. Being up front could make you a more favorable tenant.
Spend less on bills
Good scores typically mean lower interest rates for loans and credit cards. With a lower interest rate on a mortgage, car, personal loan, or credit card, you’ll have lower payments and can put the money you save toward other expenses or saving options. Knowing your score can also help you negotiate a lower interest rate in some instances. Say you’re at a car dealership and they offer you on-the-spot financing at a fixed interest rate. If you know your score, you can determine if they’re offering you a fair rate. You can often ask the salesperson to see your credit score when they pull it, too.
Catch mistakes and fraud
Companies make mistakes. Peoples’ identities get stolen. Both errors and security breach warning signs can be in your credit report and drop your score. If you monitor your score, and there is a sudden drastic change, it can be an alert that something may be wrong. If you haven’t made any recent changes, pull your credit report. You can request a free credit report once a year from the three major credit reporting agencies:
Your credit report is different than your score. It’s all the detailed records that help make up your score.
Once you access your report, look through it carefully. If you find inaccurate information, you can dispute it. If an error was impacting your score, once it’s resolved, you may see your credit score increase.
Financial institutions like First PREMIER Bank are legally bound by the Fair Credit Reporting Act, which requires accurate data reporting. This is to protect the integrity of the credit reporting system and ensure proper record of customer performance.
How can I increase my score?
Even if you have a low score right now, you can always work on building it up again. There are many things you can start doing today to increase your score.
One of the most important habits to start now (or continue to do) is paying all bills on time, according to Fair Isaac Corporation. Then, start to pay off more of your debt each month, as opposed to always making minimum payments.
While it’s good to have a mix of credit, don’t sign up for a lot of new credit cards all at once, whether it’s offers you receive in the mail or at the mall. Every time you request a new credit card or loan, that company will likely request your credit report and FICO Score. This is considered a hard inquiry, as the lender is reviewing it for purposes of borrowing you money because you explicitly applied for it. This can have a temporary negative effect on your score. However, if you’re getting a mortgage, auto loan, or student loan and request rates from different lenders within a certain time period, it won’t count as multiple requests. So please, shop around for the best deal!
You are in control of your FICO Score, and with the right mind-set, planning, and knowledge, you can work to increase it starting today.
This information is presented for educational purposes only. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.