What is a FICO Score? Your Questions Answered!

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What is a FICO score, and is it important?

The FICO score (credit score) is the most widely used credit score model in the United States. It stands for “Fair, Isaac, and Company,” and ranges from 300 to 850.  The FICO model is used by the majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion.  FICO scores can vary depending on which bureau provides the information to FICO to generate the score.

 

Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history.

 

What affects my FICO score?

  • Payment history—Bills paid on time will improve your score, where late payments on bills, such as a mortgage, credit card, or auto loan, will cause your FICO score to drop. 
  • How much credit you currently have—The ratio of current debt (such as credit card balances) to the total available credit or credit limit. FICO scores can be improved by paying off debt and lowering the credit utilization ratio.  Applications for and receiving the credit limit increase will also drive down the utilization ratio.  Opening new lines of credit will have the same effect (keep in mind the “Average age of tradelines” and “Hard inquiries” matrices on the last possibility). The closing of existing revolving accounts will typically adversely affect this ratio and therefore have an adverse impact on a FICO score.
  • Length of credit history—The longer your credit history the more a positive impact it will have on your FICO score.
  • Types of credit used (mortgage, student or auto loans, lines of credit, store credit cards, etc)—It can be beneficial to have different types of credit.  I don’t recommend opening new credit just to improve your score)  It won’t impact enough to make a difference, and can lead to large debt.
  • Recent credit searches— If you are applying for credit cards or a revolving credit line, it will affect your credit score.  Each store or lender will check your credit, causing it to go down.  Think twice about taking that offer to get an extra 10% off your total at department stores!
    • Any credit inquires drop off your credit report after 12 months, and don’t impact your score.
    • If you or an employer check your credit score, that will not affect your score.
  • Money Owed – any money owed for child support, tax lien, law suit, etc. can negatively affect your score.
  • Opening Many Store Credit Cards – having many newly opened accounts can cause your score to drop on top of just having many credit searches.
  • Bankruptcy & Foreclosures have a negative affect on your score, and can dramatically decrease your score.
  • Closing Credit Cards – if you want to close a card, just cut it up, but don’t close it.  Let it close on it’s own, which it will if you don’t use it long enough.  Closing a bunch of cards will decrease your score.

 

What is a good FICO score?

The FICO score ranges from 300-850.  A “good” credit score is generally anything above 700.

 

How do I find my FICO score?

You can get a FREE credit report each year from any of the 3 credit reporting agencies, Experian, Transunion, or Equifax.  I recommend www.creditkarma.com.  They offer a free credit report with no strings attached… no trial periods to have to cancel later on, no signing up for anything, just a free report.

 

Who can see my score?

Any company or employer that you give your social security number to can see your credit score.  Any inquiry to your credit by credit companies will show up on your report.

 

What can I do to improve my score?

1. Reduce your debt to income ration.  Pay bills on time – set up automatic bill payments online to ensure timely payments.  Just remember to keep a large enough balance in your bank account to ensure you don’t overdraw your account because of a forgotten automatic payment.

2. Don’t apply for a lot of loans or credit cards – pay cash = no debt.

3.  Make payments on delinquent debt.  Even if it’s only $5/month.  It will show you are working toward getting out of debt.

4. Don’t hold a credit balance on your open credit cards.  Credit balances lead to lower scores, late fees, and interest payments.

5.  Cut up credit cards you are using, but don’t close them.  Just let them close on their own from non-use.  Closing your accounts deceases your available credit, which decreases your credit utilization ratio.  (how much debt you have/total credit limit)

6.  Increasing your credit limit will increase your score.  Just remember it’s best to pay cash.

 

What do I need a FICO score for?

If you are planning to purchase a house, rent, buy a car with a loan, open a business, or purchase ANYTHING on credit, you will need a good FICO score.  If you don’t have a good score, you will not be able to open any credit or loan account.  A good FICO score will enable you to get the lowest loan rates possible.

Good credit scores can allow you to:

  • have a better chance for credit card and loan approval
  • get the best mortgage and  refinance rates
  • have more negotiating power
  • get approved for higher credit limits
  • get easier approval for rental apartments or houses
  • get better car insurance rates
  • open a cell phone contract without a security deposit
  • open utility accounts without a security deposit 
  • easily rent a vacation home

 

My credit score is very low, is it too late?

It’s never too late to improve your score.  Look above for steps to increase your score.

 

I don’t have any credit history, should I open some credit cards and maintain no balance to increase my score?

No, you do actually have a credit history by not having any outstanding credit or debts.  Lenders will see you have a good record with no delinquencies.  You can still get approved for a mortgage or loan.

 

Isn’t some debt good, like a mortgage for tax purposes?

The only good debt is debt that is paid off.  Even though you do get a tax write-off on interest paid on a mortgage, it will not outweigh the benefits or savings from interest paid on your mortgage.  If you pay your mortgage early, you are saving years worth of interest payments that will far surpass the amount of interest you write off on your taxes.

 

I don’t have good credit, should I ask someone to co-sign a loan for me? 

Never!  You don’t want to ever drag someone into a loan with you.  It is never a wise option.  No matter how much you think you need that house or car or money to pay off existing debt, asking for help this way should never be an option.

 

 

Check out more tips on how to minimize your debt here.

 

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“The borrower is servant to the lender.”  Proverbs 22:7b

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