How important is your FICO score? If you’re buying a house or car, getting insurance, or even applying for a job, it can be critical. Your FICO score, also known as your credit score, helps lenders determine what interest rate to give you, and many insurers use it to determine your premiums. A low score can even prevent you from renting the apartment you want or, worse yet, make you ineligible for certain jobs.
Surprisingly, with so much riding on this number, very few people understand how the FICO score is calculated, what the score means, or what they can do to improve their scores.
1. EVALUATE YOUR SCORE. THE POINT SYSTEM USED TECHNICALLY RANGES FROM 0 – 999, BUT ALL OR NEARLY ALL ACTUAL SCORES FALL BETWEEN 330 AND 850.
|330 – 619||Poor credit. In banker terminology a person with a score in this range is considered a “Credit Leper.”|
|620 – 659||Sub-prime financing will be available to you.|
|660 – 720||Prime financing will be available to you.|
|721 – 750||Prime interest rate may be available to you. That is, you may be able to get interest rates on loans that are even lower than the prime rate.|
|751+||Excellent credit. May enable you to get even lower prime – interest rates depending on the credit type you’re utilizing.|
2. UNDERSTAND WHAT AFFECTS YOUR CREDIT. THE EXACT CALCULATION OF THE FICO SCORE IS KEPT SECRET AS PROPRIETARY INFORMATION, BUT THERE ARE SOME GENERAL GUIDELINES THAT CAN APPLY.
|35%||of your credit score is based on your consistent payment history and only includes payments later than 30 days past due.|
|30%||is based on the percentage of your credit capacity being used; i.e., the ratio of current credit debt in comparison to total available credit or revolving credit. If you carry very low balances on credit cards, your score will be higher than if all your cards are nearly maxed out.|
|15%||of your score is determined by the length of your credit history.|
|10%||is based on the types of credit you have; i.e., installments (car payments, student loans, or a mortgage), revolving (credit cards or lines of credit), and consumer finance (bank loans and the equivalent).|
|10%||is based on recent searches for credit and/or the amount of credit you’ve recently obtained. Every time you apply for credit it affects your score negatively.|