We’ve all heard about how important your credit score is when it comes to purchasing a new home or applying for a credit card, but the reality is that, according to the Huffington Post, nearly 50% of Americans don’t know what their credit score is. In this blog I will break down the components of your FICO score and give you some pointers about managing your score.
Your FICO score is the most common type of credit score that lenders use. In essence, it is a number that determines a financial institution’s risk for lending money to you that ranges from 300-850 (the higher the score the better). Don’t feel intimidated by what FICO means either; it just stands for the Fair Isaac Corporation which is the company that produces the method for credit bureaus to create FICO scores. As aforementioned your FICO score is used to determine your likeliness to receive a mortgage or auto loan, but did you know it can also be used in determining whether or not you get hired at a company?
There are 3 credit reporting agencies who report FICO scores: TransUnion, Experian, and Equifax. Each credit reporting agency reports different information so not all 3 scores will be the same. The breakdown of your score looks something like this:
- 35% Payment History
- 30% Amount Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of Credit Used
From this there are a few things you can do to help your credit score so you can get the best interest rate possible when financing your home. The first tip I have is to check your credit score annually. By law, you are allowed one time to check your credit report for free from each of the credit bureaus but you have to pay to obtain your credit score. You can visit annualcreditreport.com to do so. Don’t check your score on your own more than once though, it can actually hurt your credit score by doing so!
The second tip I have is to reduce the amount of debt that you owe. This means limit the use of your credit card to only larger and planned expenses that you can pay off right away. Have you have multiple outstanding loans or credits in your name, use your credit report and begin budgeting to erase those negative balances.
The third tip I have is to make payments towards loans or credits cards in full AND on time. Typically you will have 25 days from when your outstanding balance is put on a statement for you to pay off you debt. Making only the minimum payments will end up costing you more money in the long run so do the best to pay off as much as you can at a time since most of us cannot afford to make a one-time $20000 payment towards a student loan for example.
FICO scores can be confusing and hard to understand so I hope this general information will enable you to get thinking what your score is and what you can do to manage it. If you would like more information about credit scores visit myFICO.com.