FICO Score: Why it matters and what you can do to change it
For anyone who has tried to borrow money to purchase a car, buy a home or open a revolving line of credit, you may be familiar with the term FICO Score. The vast majority of lenders use this scoring model, which essentially determines a person’s creditworthiness.
“The FICO Score may seem like a big, daunting mystery, especially since your score can have a huge impact on your ability to borrow money at a competitive rate,” said Jim Johnston, of Colorado-based Bellco Credit Union. “The truth is, however, you do have power over your credit score, and there are things you can do to improve it over time.”
First, it’s important to understand what makes up your total FICO score. (FICO was named for the data analytics company Fair Isaac Co., which created the first credit-scoring system.) In general, a credit score breaks down as follows:
* 35 percent is your payment history – Do you pay bills on time?
* 30 percent is the amounts you owe (on loans, credit cards, etc.) – Owing money on different credit accounts is not necessarily bad, especially if you’re paying your bills on time every month. FICO takes into account how many of your accounts have balances, if you’re using your entire credit line, and how much of any installment loan (like a car loan) you still owe.
* 15 percent is the length of your credit history – In general, having a long credit history is good, but even if you’re young and barely have any credit history (such as having credit cards and a new car loan), you can still have a high FICO score.
* 10 percent is your credit mix – What is your mix of credit, meaning credit cards, retail accounts, installment loans, mortgage loans, etc.? A good mix of credit, especially with a history of on-time payments, is helpful to your score.
* 10 percent is any new credit – If you’ve opened numerous credit accounts in a short period of time, this can have a negative impact on your credit score. Although closing a credit account still shows up on your credit history, it has no impact on your score.
Repairing your credit takes time, so it’s important to be patient. Below are three immediate things you can do.
1. Check your credit report – The first thing you should do is get a free copy of your credit report and make sure there are no errors. If you find an error, you have the right to dispute it with the credit bureau.
2. Get organized – Don’t make any more late payments on your credit cards. The best way to do this is to get organized. Set up auto payments through your bank or credit union, or set reminders to make payments before they are due.
3. Pay down your debt – While this is no easy task, it will make a difference. Use your credit report to make a list of all your credit cards and the balances you owe. Pick the credit cards with the highest interest rates, and tackle those balances first. Most importantly, don’t add to your debt by continuing to use your credit cards.
Keep in mind, your FICO Score does not take into account your annual income, length of employment, or if you may be receiving other sources of financial support such as alimony or child support. However, these are things that your bank or credit union can take into consideration when you’re borrowing money, so it’s not all about the FICO Score.
Finally, knowledge is power. Understand what your FICO Score is, how a good or bad score can impact your life, and if a low FICO Score is holding you back from being able to buy your first home or car. There’s no better time than now to begin to make positive changes to improve your score.