FICO Score Explained – Building a Good Credit Score

What is a FICO Score and How Does it Affect You?

Knowing your financial assessment is crucial to know where you remain on installments, your debt to credit ratio, and open credit lines and accounts. On the off chance that you have a low FICO rating, it is possible to fix it. Building a good credit score is possible. To do this, you need to realize what every one of the terms is. Furthermore, this article will explain and touch on several parts of your FICO score. We will talk about what it is, how to read your credit score, and it can hurt or help you financially.

Understand Your FICO Score When Building a Good Credit Score

What is a FICO Score?

The Fair Isaac Corporation introduced the FICO Score. It is a factor that contributes to your overall credit score. Your FICO score percentages break down into the five main groups. These groups are listed below.

5 Main Factors that Impact Your Fico Score

  • Records Owed. This point shows the amount of cash you owe to different businesses. 30 percent of your financial assessment relies on this number. Also, your FICO score reflects what you owe money on against what number of credit extensions you have open. This calculation of amounts owed versus open credit is called credit utilization.
  • Payment History. This history keeps track to check whether you make your installments on time. Furthermore, your credit report will show if missed payments were 30, 60, 90, or 120 days late. Your payment history accounts for 35 percent of your credit score.
  • The Total Length of Your Credit History. The more credit history you have as a consumer, the better your credit score is. As a result, your score is calculated by how long your oldest account has been open and averages it with the ages of the newest account open. This age of accounts percentage makes up 15 percent of your credit score.
  • New Credit. New credit means any newly opened accounts that are currently on your credit score. This rate makes up 10 percent of your FICO assessment.
  • Credit Blend. For you to get a FICO rating, you need to have a decent combination of three types of accounts. They are retail, credit, and installments. This combination or credit mix will make up the final 10 percent of your score.

Fico Score can be Viewed Online

Each of these factors shows up on your credit reports. You can access this report free online. The better you understand them, the easier it is to fix your score. Also, you are entitled to one free credit check per year, from each of the three credit companies. You can spread them out or get them all at once. Spreading them out will help you check for fraud all year round. You can access your report from a company like FreeScore360.

What Factors Are Not Included in My FICO Score?

You have to know what factors don’t affect your score, so you don’t concentrate on the wrong things.

  • Soft Inquiries. A soft inquiry on your credit report usually means you applied for a credit card. They appear as something you did on your own, and not through a lender. They will show up on your overall credit report, but won’t damage your FICO score.
  • Current Residence. Your credit reports will have your current address, but your FICO score will not. Your residence does not factor in when they calculate your score, so they don’t need it to be updated.
  • Employment History. Your FICO score doesn’t need anything related to your work to calculate your score. Your history, salary, employment dates, and occupation are not required. They will show up on your credit reports, and you can update them as you need too.
  • Financial Obligations. If you pay child support or spousal support, they won’t affect your FICO score. If you have late payments or missed payments, they won’t show up either way.

What is Your FICO Score Range?

Your FICO it varies by which purpose you want to use it for. This FICO assessment ranges from 300 to 850, with a good credit level being 670 or higher. The higher your score, the less of a liability you present. A higher score makes lenders more open to working with you. Also, if you have an excellent assessment of 760 or greater, you will be eligible for lower interest rates. You can also qualify for discounts on your insurance. Are you seeing no credit score change? Furthermore, be aware of factors that can limit your FICO credit score from increasing. Each credit company bases their scores a little differently, but you should try for above 670 either way. The different scoring models are listed below.

  • Base FICO Score: 300 to 850
  • Equifax: 280 to 850
  • Experian: 330 to 830
  • TransUnion: 300 to 850
  • Vantage: 300 to 850

How Do You Read Your FICO Score?

The first thing you should do once you get your credit score is look everything over. Check that any personal information, open accounts, closed accounts, and your payment history are correct. Mistakes do happen, and they can damage your score. If you see any errors, submit a dispute with the credit company. They will investigate and remove it if they find it to be a mistake. You can have different scores. Each of your reports could vary in their information because lenders aren’t required to report to all three credit bureaus. You can contact the lenders and ask them to report any accounts to all three companies if you wish.

Tips for Maintaining Your FICO Score and Building a Good Credit Score

Once you’ve received your credit report and checked it for accuracy, you have to make a plan to manage it. If you don’t have a long credit history, you will work on building up what you do have. Your goal is to get out of debt and stay out while keeping current on any payments. There are six primary things you can do to build and maintain your FICO score.

1. Keep As Many Accounts Open As Possible.

It may be tempting to close any accounts, but this could hurt your score. Even if you pay off a line of credit, keep it open because this will build your credit history.

2. Never Default or Pay Late on a Card.

A default credit card can drop your FICO score quickly. If you make any late payments, this will also lower your FICO. This step is the most important step out of all six things you can do to help your credit. You do not want to ruin your credit. If you have a habit of forgetting to pay, set automatic payments, so you don’t’ have to worry about it. You can also set alerts and reminders to help you.

3. Don’t Move Balances Around to Different Cards.

It’s tempting to move your credit card balances around to a 0 percent rate, but this won’t improve your score. You run the risk of not paying off the balance before the promotion ends. If this happens, they could charge you the standard rate on the entire remaining balance. They could also add on a transfer fee, up to 4 percent.

4. Do Not Open a lot of New Credit Lines

You may be tempted to open up heaps of new credit lines to help you. However, this could get you in a bad position. Every card you apply for will add a hard inquiry on your report. Consequently, a hard inquiry can drop your score up to five points per time.

5. Ask To Have Any New Accounts Sent to Each Credit Bureau.

You want it documented if you open a line of credit to build your score up. You can call the company and ask them to report it to each of the three bureaus. Furthermore, if you don’t, you’re defeating the purpose of opening a new account.

6. Keep Your Credit Use Low.

You should try to keep your credit card balance below 20 percent of the overall limit. Companies don’t like to see high balances or high credit utilization on credit cards, even if you pay on time. If you can keep it at or below 10 percent, you can build your score faster. If you call the company and ask when they report to the bureaus, you can pay it ahead of time. Also, this will reflect a zero dollar balance, and that looks good to the credit companies.

Building a Good FICO Score Helps With the Loan Approval Process

Building a good credit score and maintaining your FICO score can seem like an overwhelming task. It is easier to tackle it one piece at a time and make a plan. Also, this will help you keep on track, and maximize your credit score. You will see improvements at a decent pace if you follow the outlines and instructions in this article. The end goal is to have great credit so you can apply for loans, mortgages, and credit cards. In conclusion, you can achieve a good FICO score if you work at it and have patience.

Monica Kowollik

Director at CreditFast.com
Monica has covered credit card and personal finance news for over 15 years. From an early age, she developed an interest in financial literacy and saving money. Monica hopes to help others to improve their personal finances one article at a time.