The different needs and circumstances of borrowers call for varied types of home loans. For…
Achieving a high FICO score is advantageous in lots of ways. While a perfect score of 850 may not be possible, why not aim for a score above 670? Although lenders use different norms to assess credit applications, a score of 670-739 is acceptable to most. By understanding how FICO scores work, you too can aim for a high FICO score.
What is a FICO score?
The Fair Isaacs Corporation (FICO) has devised a credit scoring system that is widely used by lenders. A FICO score is a weighted calculation based on your credit reports that reflects how you manage credit. It consists of your payment history (35%), amounts owed (30%), new credit (10%), length of credit history (15%), and credit mix (10%). FICO scores are three-digit numbers ranging from 300 to 850.
Lenders use FICO scores to gauge the risks of granting credit to different types of borrowers. It is a tool lenders use to distribute credit fairly, consistently, and efficiently and to lower their costs. Higher scores present lower risks to lenders. A score below 580 is usually considered risky, while a score above 670 is acceptable.
Why good FICO scores matters
If you have a good FICO score, lenders see you as more likely to repay a loan. This score, combined with details of your income, employment history, and any pertinent information in your credit report, is considered by lenders when you apply for credit. A good FICO score enables you to negotiate favorable terms when applying for a loan. What’s more, you can shop several lenders to find one that offers the best rate. This translates to a lot of savings in fees and interest.
So whether you need a credit card to cover college expenses or a mortgage to buy a home, a high FICO score can help to lower costs. You will also find it easier to deal with some insurance companies and utilities that check FICO scores when offering services.
A good FICO score shows that you are managing your money responsibly and adds to your credibility. Being financially secure improves your sense of well-being too.
How to improve your FICO scores
Achieving a high FICO score requires some work. Start by checking recent copies of your credit reports. You can get free copies of your credit reports each year from the three leading credit rating agencies Equifax, Experian, and TransUnion, by applying at AnnulCreditReport.com. Information in your credit reports shows the factors affecting your FICO score. You can then focus on areas to improve.
If you see any errors in your report, contact the relevant credit bureau and the creditor who reported this information. Your FICO score may improve when you get inaccuracies corrected.
Paying bills on time helps to improve your FICO score. Even if you missed payments in the past, being current on recent payments is a sign that you are taking control of your finances. If you find it difficult to pay dues in full, try settling the minimum due on each and pay down the one carrying the highest interest first. Keep doing this until you can meet the interest and balances outstanding in full each month.
How much money do you owe? There are several ways the amounts you owe on loans and credit cards affects your FICO score. How much do you owe in total? How much of your approved revolving credit have you used? Do you have different types of loans? All these factors matter for your FICO score. You can improve your FICO score by paying down installment loans and using credit cards reasonably. These are signs that you are managing debt responsibly.
Creditors also look at your credit mix when determining risk. For example, your credit mix can consist of a revolving facility such as a credit card and installment loans such as mortgages or car loans. The types and amounts of credit accounts are also pertinent. Overall, what matters is how well you manage credit.
A good credit history indicates to lenders for how long you have managed credit. The average age for your credit is taken based on your oldest and most recently opened accounts. The age of specific accounts is also noted. A long credit history impacts your FICO score positively. If you recently opened a credit card, aim to use around 20% of your approved limit, so you maintain a good credit history.
A new credit facility can lower your FICO score, as it leads to a lower average age for your accounts. If your credit history is short, opening too many new credit accounts within a short period is considered risky. Applying for credit triggers inquires by lenders who check your FICO score and credit reports. Although credit-related inquiries remain in your credit report for two years, only those made in the last twelve months affect your FICO score.
Achieving a high FICO score requires hard work and commitment. If your FICO score is low, make a plan to pay down your debt and better manage expenses. You can then enjoy the benefits of having a high FICO score.