You’ve probably heard the term FICO Score before. But are you fully aware of the weight that number carries in your life? Whether it’s on commercials, applications or on your bank’s website, it’s time you learn just what it means and why it matters.
What is it?
What is a FICO Score? Essentially, it’s a key component of your financial wellbeing. It was created by the created by Fair Isaac Corp. and is used by the vast majority of lenders to determine your financial risk.
Your individual score can be found on certain bank statements, or you can check with any of the major three credit reporting agencies. It is a three-figure number that should fall within the 300-850 score range.As a quick overview: Anything less than 579 is viewed as an “indication of a very risky borrower;” 580 to 669 is means “some lenders will approve” you; 670 to 739 is the average score among U.S. borrowers and is “considered good;” 740 to 799 is viewed as an “indication of a very dependable borrower;” and anything above 800 is an “indication of an exceptional borrower.”
This score range was introduced to establish an easy-to-understand, common frame of reference for lenders and consumers. Basically, the higher the credit score, the better financing options and rates you have.
Why does it matter?
Your FICO score is important because it helps determine your ability to get a loan and what rate you can get it at. If you ever want to buy a home, purchase a car or apply for a credit card, you’ll need to disclose your credit score. Lenders will look at your score and determine what kind of risk they’re willing to take if they lend you money.
That means applicants in the lower brackets will often pay higher interest rates or have less favorable terms as compared to credit applicants with a higher score, which could also translate into higher security deposits at apartments, higher payment plans on your cell phone, and more.
Which brings us to your next question.
How do I improve my score?
FICO Scores are calculated from many different pieces of credit data in your credit report. About 35 percent of it is calculated by looking at your credit payment history, 30 percent of it is how much you owe, 15 percent is how long you’ve had your account(s), 10 percent is your new credit and the final 10 percent is calculated by looking at the different types of credit you’ve accumulated. If you want to raise your score, you need to look at each factor and improve it. For example, you could raise your score by maintaining a low balance, paying your minimum dues on time and keeping credit cards open for as long as possible. Most importantly, you want to bring your score up, you should track your finances and make responsible decisions.