What's Your Score?
The most commonly used credit scoring tool is the FICO score. FICO looks at all the information in your credit report, crunches the numbers and shoots out a score between 300 - 850. So how does FICO score your credit?
Credit Payment History. 35% of your FICO score is based on whether you pay your bills on time. Pay your bills on time. It’s that simple.
Credit Utilization. 30% of your FICO score is based on how much of your available credit you are using. Keep your debt balances (especially credit card debt) low in relation to your overall credit limits. Utilization between 10% - 30% will score you the most points.
Credit Age. 15% of your FICO score is based on how long you’ve had credit by looking at the “opened” dates on your accounts. Sorry youngsters, this means the older your credit history, the better.
Account Diversity. 10% of your FICO score is based on how many different types of accounts you have (or have had), including credit cards, car loans, student loans and mortgages. The more diversity, the better.
Note: finance company accounts on your credit report will hurt your score. Finance companies normally target high-risk consumers. However, for example, if you take advantage of a special offer to finance a new furniture set or a big screen TV, the retailer’s lending partner could be a finance company. So if you take advantage of the offer, your credit score will be negatively affected, even if you pay on time. FICO doesn’t like to see that you received credit from a lender who specializes in lending to high-risk consumers.
Credit Inquiries. 10% of your FICO score is based on how many “hard” credit inquiries have hit your credit report. When you apply for new credit a “hard” inquiry is posted to your credit report. If you have too many inquiries it indicates that you are shopping excessively for credit, which will lower your score.
Note: checking your own credit report, which you should do at least annually, is considered a “soft” inquiry and has no impact on your FICO score. Get a free credit report from each of the 3 major credit bureaus every year by visiting: https://www.annualcreditreport.com.
To get your FICO score for free, visit http://www.myfico.com. WARNING: you can only get it for free by signing up for their Score Watch tool. So sign up, get your free FICO score, but be sure to cancel within the 10-day trial period. For your reference, a FICO of750+ is excellent. Only about 10% of the population has a coveted FICO of 800+. Alternatively, most credit card companies are now offering free FICO score updates through their websites under your normal account login for that particular credit card.
Finally, having an excellent credit history and FICO score isn’t just for obtaining loans. Insurance companies use it, as well as some employers. So don’t avoid credit, just be smart about it!