If reading isn’t your thing, here’s a video I made covering FICO scores
So, what is a FICO score? First, FICO stands for the Fair Isaac Corporation. The FICO score was created in 1989 as a standardized way for lenders to interpret your credit report and determine whether or not to give you a loan.
How is a FICO score different than a credit report? A FICO score is simply a summarized version of your credit report. Your credit report lists all your credit history, but it doesn’t keep track of everything forever. Good credit is maintained for 10 years and bad credit is tracked for 7. What’s on your credit report? If you have a credit card, auto loan, or mortgage all of that will be included.
Why does your score matter? A quick caveat, if you follow Dave Ramsey’s philosophy, be aware an undeterminable score (AKA a score of 0) is very different from having a bad score. Dave cites 6-12 months after you close your last account to reach an undeterminable score, but I was not able to verify this number with a third party. If that’s what you want to do, that’s perfectly fine, but your credit score will potentially affect you until it reaches “zero”. Here are some areas your score will affect: Better terms when you get a loan, lower insurance premiums, the ability to rent in some apartment complexes, potentially new jobs who require a credit check on new employees.
Your FICO score is composed of five categories:
Payment history (35% of your scores)
- Do you make all of your payments on time? (Good) Are you delinquent on any accounts? (Bad)
Amounts owed (30% of your scores)
- How much do you owe on your mortgage or car loan? Along with revolving credit on your credit cards? The lower your credit utilization rate the better.
Length of credit history (15% of your scores)
- The longer your credit history the better, so if you have an old credit card even without good rewards, keep it open. Put a few dollars on it every now and again and pay it off, that way you maintain your credit history
New credit (10% of your scores)
- Credit accounts opened within the past two years. The more applications you have the worse you look to a potential lender. The impact fades over time and is completely phased off after the two year mark
Credit mix (10% of your scores)
- Do you have a mortgage, a car loan, credit cards? Certain loans (i.e. a payday loan) look worse to potential lenders than others
How do you get your credit score? There are lots of free and paid ways to get your score, but the easiest is probably through your credit card company of choice. Personally, with AMEX I can check my credit score whenever I want through their website. To get your actual credit report the three big credit bureaus: Experian, Equifax, and TransUnion offer your credit report (different from your credit score) once each year for free as mandated by federal law. Here’s the only link endorsed by the government to get your free credit reports
. Currently because of COVID-19, you can get your report free each week through April of 2021.
Also, it’s a myth that checking your credit score will lower it. The reason why is because there are two different types of ways credit is checked: 1) Soft check occurs anytime you check your own score or when a lender checks your score to preapprove you 2) A hard credit check occurs when a lender checks your credit to determine if you met their lending criteria such as applying for a mortgage or new credit card, this would lower your credit score slightly
What can you do to improve your FICO score?
First off, there isn’t a quick and easy way to improve your score. Any companies trying to sell you a service to improve your score are more than likely scams. The one instance where you may be able to improve your score quickly is if there is incorrect information on your credit report. If that happens you don’t have to pay anyone to fix it. You can write a letter (include documentation) to the credit bureau to get the problem fixed.
Always pay in full and on time
Keep your credit utilization rate low, one way to reduce your credit utilization rate is to increase your credit limits. So long as you pay everything off every month you should be able to request a credit limit increase every 9 months
Keep your credit cards open for a long time
Only open new lines of credit when you need to, such as when applying for a mortgage
If you made it this far, I hope it was helpful!