Your credit score—it’s a very important number. It’s called FICO, which stands for Fair Isaac Corporation. That’s the company that designed this scoring system. The scores range from 300 to around 800. It is an algorithm, or a statistical model, which basically means they use a bunch of math to figure this out. There’s a great video on the Federal Reserve website about understanding your score. It’s less than 10 minutes, a great piece you can watch.
There are five main parts to your score. About 35% is going to be about your payment history. 30% will be your debt/credit ratio. 15% is the length of your credit history. 10% is the frequency with which you take out new credit. And 10% will be the types of credit.
You can see your payment history is the most important piece of all of that. Late payments will stay on your credit record for 7 years. That’s a long time for a small mistake. A bankruptcy will stay on there for 10 years. That means you need to pay your bills on time and in full if you don’t want to mess up that piece.
Next, is the debt/credit ratio. That is how much you owe versus your credit limit. You want to keep that below 50%. That’s the magic number that they look at.
Then, the length of credit history… All of that says that you probably want to hold on to some of those old credit cards, because they will look at how long you’ve had that credit.
The frequency of new credit… Here, I am one of those who love to take advantage of those 20% offers when you stand at the register to sign up for a new card. That can ding your credit.
And, the types of credit… They want to see that you have a variety of loan types. That’s a good thing. So, a mortgage, car loan, credit cards instead of just one type.
Now, we all know that the credit score is used when taking out a loan, but did you also know that it will be looked at when you try to rent an apartment or get car insurance? (It can determine those premiums.) Even when you apply for a job. They’re going to look at your credit report and your credit history and rate.
The lower your interest rate, the more house, car, or stuff you can afford. So, those score below 720 means you’re going to pay more on those interest rates on those loans. We know that half the people out there have a score below 700, and a third have a score that’s even lower than that. If you want your number, you can pay for your score. There are some agencies out there offering the score for free. Remember, by law if you are turned down for credit, you are entitled to not just the report, but a free score. Start working on it. It takes a long time to build up that record, and you want to keep it in pristine order.