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By Denise Downey

Your FICO Credit Score

Many, many things are more exciting than a credit score. Unfortunately, our credit score defines the contours of our adult lives.  So, it’s worth a few minutes to make sure you understanding what this score is and how it impacts you. 

 

What is a FICO credit score?

Our credit scores come from FICO.  FICO, originally the Fair Isaac Co., specializes in predictive analytics.  They leverage data from the credit three major credit reporting agencies, Equifax, Experian and TransUnion to craft a credit score. The score represents how risky or safe it would be for a company to extend credit to you.

Most of us understand that our FICO score drives our ability to get a loan or be approved for a credit card. But it can also affect things like our car insurance rate.

 

What Makes a Credit Score?

Here are the factors that impact your score.

  • Payment History (35%) Pay your bills on time to maximize this dimension of your score. If you have unpaid or late bills, expect a lower score than punctual payers.  It takes 7 years for a late or unpaid bill to fall off your credit score, but more recent incidents carry more weight. 

  • Credit Utilization (30%) How much of your available debt are you using? Having open credit cards is not bad, but keep the balance low. Cards that are maxed out or even close to being maxed out can negatively impact your score. 

  • Length of credit history (15%) The longer you have had credit, the better. If you currently do not have any loans or credit cards, consider putting the utilities in your name or opening a credit card and paying it off every month.

  • Recent inquiries (10%) Every inquiry to your score negatively affects it temporarily. Think about this before you apply for a store credit card “to save 10% on today’s purchase”. That 10% you saved on that purchase could cost you way more in the long run if you’re also in the process of applying for a home loan or plan on buying a car soon.

  • Types of Credit (10%)  Sometimes having no credit cards at all can be looked at as a risk by creditors. Diversifying your credit can help your score.  Creditors will usually attribute a higher score to someone who has a mortgage, an open credit card, and student loans than to someone who has none or only one of these types of credit.

 

What Is Considered a Good Credit Score? 

Inside the US Treasury, the Office of the Comptroller of the Currency (OCC) assigns the various tiers of credit scores.  They associate each tier with a different level of risk. 

Credit scores range from 300-850.  They view credit scores above 660 as prime. 620-659 are considered “moderately risky”.

Credit scores under 620 are viewed as subprime. (You may remember how “subprime” loans helped fuel the Great Recession of 2008.).  

If your score falls in the 700-850 range, you’re considered low risk.

 

Wrapping up

If your score isn’t quite where you want it to be, there are ways to improve it.  But there is no magic bullet and you should be cautious about any company promising to make your credit score improve overnight.  A good score can be achieved through diligent bill paying and disciplined credit.