Understanding and Improving Your FICO Credit Score

FICO Credit Score

Knowing and managing your FICO credit score, used by most lenders, is critically important to securing access to loans and credit.  In this article we will explain what FICO is, key factors that FICO considers in its calculation, and six steps that you can take to improve it over time.

What is FICO?

When you need to borrow money to buy a house, a car, or to pay for college, for example, or when applying for a Credit Card or any other credit product, lenders usually check your FICO score. What is this? It’s one of the most common scores used by Lenders to make credit decisions. FICO uses some of your financial information to calculate a three-digit number. This figure will be your financial image from which Lenders will determine if you are suitable for a loan or a credit card, as well as establish its terms and conditions – including how much to lend you, for how long, and at what interest rate.

This is why it is a smart move to know and improve this number ASAP, so you can get more and better benefits. If you do not know how to do this, don’t worry. We will guide you through this topic.  

What Factors Does FICO Score Consider?

FICO scores consider and weighs several historical factors: 

  • PAYMENT HISTORY(contributes 35% to your score)
    This is the most important factor in a FICO score. The history of paying your bills in the past is a great predictor on whether you will pay your bills on time in the future.
  • YOUR DEBT (contributes 30%)
    Your ability to manage the credit and balances is something FICO scores looks for. If you use a lot of your available credit, lenders could consider that you are high risk. Beware, having unutilized accounts with zero balance does not mean you are low risk.
  • LENGTH OF CREDIT HISTORY(contributes 15%)
    FICO looks for the age of your oldest credit account, the age of your newest credit account and an average age of all your credit accounts. 
  • CREDIT MIX(contributes 10%)
    FICO scores consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have them all, but a good mix will improve your score.
  • NEW CREDIT(contributes 10%)
    This means that they check if you open new credit accounts and how often.

With these factors in mind, your FICO score let the lenders know whether they can trust you with their money or not. How likely is it that you will be able to pay it back? 

Is my FICO Credit Score Good or Bad?

There are many websites out there where you can find out your scores, such as Experian or myFICO. Your FICO Score can range from 300 to 850; the higher the number, the better the score.   

Most Lenders interpret this score as follows:

  • 300 – 579 Poor
  • 580 – 669 Fair
  • 670 – 739 Good
  • 740 – 799 Very Good
  • 800 – 850 Exceptional

Those with scores above 670 will usually have higher success getting approved for a credit card or car loan. Unfortunately, those with scores below 620 are finding it hard to obtain financing at favorable rates.

But if your credit score is considered a bit low or not good enough, do not despair. Lenders will usually consider other variables before deciding to lend you money or deny it. These factors can include:

  • Your income
  • How long you have been at your job
  • How much you are asking for

That being said, the FICO score is a big deal-breaker for most lenders, so you need to start right now to work those numbers up.

6 Ways to Improve your FICO Score

  1. PAY YOUR BILLS IN TIME. Pay your credit cards, loan fees, utility bills and your phone on-time to have a positive effect on your credit score. A missed payment could hurt your score badly and will be in your bureau history for a long time. Take advantage of pay-by-phone and auto-pay capabilities that many lenders and utility companies offer, to make payments automatically.
    Make sure that you meet deadlines and pay the full amount of your credit cards. If you don’t have the whole amount this month, at least try to pay a bit more than the minimum payment requires. 
    Try to keep the balance on your credit cards much lower than the available credit limits. FICO will factor your “Credit Utilization” in its score.  This is the portion of available credit lines that you are using.   For example, say you have a Card with:
    • Credit Limit of $2,000
    • Balance on the Card is $1,000, 
    • Credit Utilization  = $1,000 / $2,000 = 50%.    
      Ideally, try to keep Credit Utilization below 30% on each of your Cards.
    As illustrated above, keeping available credit, with minimum usage and balances, will help lower your Credit Utilization.
    Credit applications, especially when they are frequent, create inquiries in the bureau. Many lenders could see this as risky behavior, because they might interpret that you are shopping and that you need additional credit. 
    Get free FICO scores monthly from your Credit Card company or other online providers.  Request a full credit report annually from each of the three Credit Bureaus, and check for errors. You can get your reports at: ExperianEquifaxTransUnion

5 ways to build up your FICO Credit Score if you do not have any Credit History 

If you are new to building credit, the first thing you need to do is getting a product that is reported to the bureau. Some examples are:

  1. A SECURED CREDIT CARD (this is different from a pre-paid credit card). To get this type of card you make a deposit that will equal its limit. Then you will be able to spend, paydown, revolve and use the card like a regular credit card.
  2. A SECURE CREDIT BUILDER LOAN. In this kind of loan, you deposit some money into the bank, and they will hold it as you paydown the loan. These loans are called Passbook or CD loans. Keep in mind: before you get it, make sure you confirm with the lender that the loan will be reported.
  3. BECOMING AN AUTHORIZED USER OR OPENING A JOINT ACCOUNT WITH SOMEBODY WITH GOOD CREDIT. But first, make sure that this person has good credit and a positive history before you become an authorized user. Also, confirm beforehand with the lender if the use of this card will be reported to the bureau.
  4. AUTO LOANS. These are usually easier to get. You could get an installment loan for a car and pay down on time. 
  5. CREDIT CARD OR PERSONAL LOANS. If you have enough credit to be able to get a loan or card, you should get one to boost your history. But please remember to make payments on time and keep the balance of the card below 20% of the limit. 

Your FICO score could either help you or hurt you. It depends on how much attention you pay to it, and how soon you start to take action to improve it. If you just discovered that you have a low number, don’t wait too long to take steps to give it a boost.

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