No one wants to think about their credit score. It’s boring at best, and for many people, the topic of credit scores can be confusing and even anxiety provoking. But being aware of your credit score—and in particular, your FICO score—is an important component to your long-term financial health.
A credit score is essentially a summary of the information in your credit report – it’s a snapshot of your risk profile. Lending organizations use credit scores to help determine how risky it is to lend you money. In other words, are you good for it?
Your credit score is not the only factor that goes into lending decisions, but it’s a big one—and your FICO score is the credit score that matters most.
Why Does Your FICO Score Matter So Much?
FICO, an analytics software company founded in 1956 (originally as Fair, Isaac and Company), is the undisputed leading provider of credit scores. FICO scores are used in 90% of lending decisions today. The top 50 financial institutions in the U.S, as well as the 25 largest credit card issuers and the 25 largest auto lenders, all rely on FICO scores to help determine whether to lend you money and at what rate.
Whether you’re applying for a car loan, mortgage, or credit card, chances are high that your FICO score will be factored into the lender’s decision. FICO scores are also considered if you’re looking to refinance a student loan, apply for insurance, or even get a new cell phone.
There are other credit scores out there, but considering how widely used FICO scores are, it’s the one to pay attention to.
What Determines Your FICO Score?
To arrive at your FICO score, FICO pulls a bunch of data from your credit report. The end result is a three-digit number between 300 and 850. The higher the number, the lower your risk—and the more favorable you look to lenders.
The data pulled from your credit report gets grouped into five categories, weighted by importance:
- Payment history: Do you pay your bills on time? (35%)
- Amounts owed: Do you have debt? (30%)
- Length of credit history: How long have you been using credit? (15%)
- New credit: Are you shopping around for new credit cards or loans? (10%)
- Credit mix: What different types of credit do you have? (10%)
While FICO clearly defines these categories, it says that the importance percentages are meant as guidelines for the general public and that the weighting of categories actually varies from person to person. The algorithm through which FICO arrives at your credit score is proprietary and therefore remains hard to predict.
How To Influence Your FICO Score
While the exact ingredients of FICO’s secret sauce may be a bit of a mystery, there are three straightforward rules of thumb for improving your FICO score:
- Pay your bills on time.
- Keep credit card balances low.
- Only apply for credit when necessary.
More specifically, here are some actions you can take to influence your FICO score:
Review your credit report.
Before you start improving your FICO score, it’s helpful to know where you stand. Check your credit report for errors to make sure the correct data is being pulled to arrive at your score. You can order credit reports and your FICO score here.
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