The Fair Isaac Corporation (FICO) is the score that tells a lender at a glance whether or not you are a good person to do business with. It is a quick take on how responsible you are with debt. A good score indicates that you are paying your bills on time and not drowning in debt. Your FICO score will not only determine if you get approved for a loan, but the better your score, the better your interest rate may be. Other industries are starting to use FICO scores to evaluate individuals, too. Employers, landlords, utility companies, insurance agencies, and cell phone companies are all beginning to look at FICO scores. If your score isn’t good enough, you may not get the job or apartment that you wanted, or you may have elevated insurance premiums.
Each organization sets their own FICO score ranges, but they are generally in the ranges given below:
- 730-850 – Excellent
- 700-729 – Good
- 680-699 – OK
- 650-679 – Poor
- 500-649 – Bad News!
The formula used to calculate you FICO score includes information based on several factors. The score is based on:
- 35% on your payment history
- 30% on your debt-to-credit limit ratio
- 15% on the length of your credit history
- 10% on the number of new credit accounts you’ve opened or applied for (fewer is better)
- 10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)
If you are not satisfied with where your FICO score is right now, you have the ability to improve it. This won't happen overnight — it takes time. The best practice to keep your score where you want it to be is to responsibly manage your credit over time. Here are some tips to help raise your FICO score:
- Check your credit report for errors annually (see below)
- Pay your bills on time
- Lower your total credit card debt outstanding
- Don’t charge anywhere close to your credit limit
- Be careful about closing credit card accounts
You can access your Free Credit Report at www.annualcreditreport.com. This is the official website for obtaining a free copy annually from each of the three reporting agencies (Equifax, Experian, and Trans Union). If you find any errors, contact the reporting agency as soon as possible.
For a small fee, you can obtain the actual 3-digit score that your lender will be looking at. Do it! It will enable you to better negotiate rate and terms for your loans and insurance. Visit www.myfico.com for more info.