Your Credit Score and What It Means
Just like a person’s cholesterol number, the credit score ranks right up there with life’s potentially worrisome 3-digit numbers. If you’ve ever bought a home or a new car, then you’re already familiar with a FICO score. But what exactly goes into this number and what does it really mean?
Calculating Your Score
A FICO score is a way to assess your overall credit risk. The number ranges from 300 to 850, with 850 being the best as it represents a low-risk account. Each of the following factors contribute to your score calculation and are weighted individually, as noted by the percentage.
The length of your credit history 15%
How much of your available credit you use (this is your credit utilization rate, which should not exceed 30%) 30%
How often you open new cards 10%
Your bill payment history 35%
Types of credit (your total mix of credit cards, retail account, loans and finance company accounts) 10%
How to Improve Your Credit Score
• Pull your credit report and immediately check for inaccuracies. Contact the credit bureaus to have these corrected ASAP.
• Also, try to negotiate any surprises that you find. If your payment history was pretty good before becoming unemployed, speak directly with creditors about it to explain the change. They may be willing to work with you.
• Document any discussions or resolutions in writing and ask the credit bureaus to do the same.
• Check your limits. Banks don’t want to see that you max out your credit cards every month, even if you pay them off on-time. So either use less of your available credit or ask for an increase in your limit. Yes, this will actually improve your score, as long as you are not charging more than 10% of your credit limit.
• Pay your bills on time. Your on-time payment history is a whopping 35% of your FICO score, so pay attention to those statement due dates.
So, if you’re in the market for a bank loan, just know that while the FICO score is an important factor, it’s not the ONLY factor that’s evaluated. Other considerations include a borrower’s overall debt to income ratio, employment history, length of time at each position and mortgage payment history.
Sources: myfico.com
