Ladies and ‘gents, I would like to introduce you to my Money Smarts 101 series. This series will talk about all the basics of personal finance that you wish you were taught in school, but never were.
Today I’m touching on your FICO score. Have you heard of it before? It’s the official term and synonym for your credit score. “FICO” comes from Fair, Isaac and Company, which is the firm that creates the most widely used credit scoring formulas and algorithms.
What is a FICO score, exactly?
Your FICO score is a numeric representation (or summary) of your entire credit history. It reflects everything from how much available credit you have versus how much of that credit you use to your payment reliability and more. This score is compiled by “The Big Three”, AKA Equifax, Trans Union, and Experian. The Big Three are the 3 largest credit bureaus in the United States that take a close look at your credit and money behaviors.
Don’t get freaked. It’s legal, necessary, and can help you.
They look at your history and reliability and traits. The more traits and behaviors you have lined up with well-known links to good credit traits and behaviors, the higher your credit score.
Your score is on a range from 350 points to 850 points. The higher your score, the lower the risk you pose to creditors and the more likely you are to receive loans and credit cards, and better interest rates on those loans, cards, etc. Generally speaking, creditors look for a score of 725 (the median credit score) or better to award good rates. Credit scores ranking 625 or lower will earn you higher interest rates from creditors.
What influences my FICO score?
There are 5 major parameters the Big Three look at when determining your credit score. I’ll list them from least influential on your credit score to most influential:
Types of Credit (10% of your score)– This score looks at the types of credit and how many you have. It will look at mortgages, auto loans, credit cards, store cards, etc.
Amount of New Credit (10%)– Opening a ton of credit sources in a short period of time looks sketchy to lenders. Every time you apply for a credit source, that source looks at your credit score. Multiple look-ups makes creditors think that you are high-risk because either you spend a lot (maybe more than you should) or there’s a cash flow problem (you’re spending money you don’t have through credit). Multiple look-ups could also be a red flag that you’re being denied by some lenders and are looking to others.
Length of Your Credit History (15%)– This looks at how long you’ve had credit in general, how long specific accounts have been open, and the length of time since using a credit account.
Any Outstanding/Owed Balances (30%)– This looks at a VERY important ratio in the credit world: Available Credit v. Used Credit. If you’re ratio is high (you’re using a lot of available credit) it’s considered risky. It makes it look like you’re having cash flow problems or are over-extending yourself financially. People with higher ratios tend to make payments late or not meet the minimum balance due, if they make payments at all.
Payment History (35%)– Obviously this is a big one, as late payments have the greatest capacity to ding your FICO score, given their weight. Creditors look at how recently and how frequently you’ve made any late payments. A 60 day late payment has a bigger chance to ding you than a 15 day late payment. But how recently the late payment happened matters. A 15 day late payment last month has more of a negative impact than a 60 day late payment 2 years ago.
And I’ve even made a nifty pie chart! I’m so resourceful:
This is a lot of information to chew. I get that. But it’s crucial to know as a college student as this is the time many get their feet wet with credit. Credit can be a very useful tool, as it helps determining your buying power, but you MUST be careful.
I’ll get more into how to use your FICO score and how to increase your responsibility and reliability in the eyes of creditors in future installments.
If you’re curious for more info now, visit these sites:
COMMENTS AND QUESTIONS:
Have any comments on questions about Money Smarts 101 or your FICO score? Do you already have a credit card or other credit? Has it gotten you in trouble or are you a champ at handling it?
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