Credit score ratings
Credit reporting agencies and lenders use the FICO system to determine whether a person is a good financial risk.
Credit score ratings affect one’s ability to obtain anything from a car loan to a mortgage; from a credit card to a job. Yes, today even perspective employees have their credit scores checked before being hired.
The three major credit reporting agencies, Equifax, Trans-Union and Experian–along with most other agencies seeking a customer’s credit score–use what is known as the FICO system to determine a credit rating.
FICO
FICO stands for Fair Isaac Company, which came up with the procedure of scaling down credit information into a single three digit number. The lower a FICO score, the higher an interest rate will likely be.
FICO scores range between 300 and 850. The following is the scale used by lenders:
- 750 and over excellent
- 720 to 750 very good
- 660 to 720 acceptable
- 620 to 660 uncertain
- below 620 good luck
How FICO computes
Several areas of information determine the level of a FICO score:
- 35% on payment history.
- 30% on the amount currently owed to lenders.
- 15% on the length of time with a credit history.
- 10% on the number of new credit accounts opened OR applied for (the fewer, the better).
- 10% on the whole of credit accounts held (mortgages, credit cards, installment loans, etc.).
Raising FICO
There are a number of ways to raise a FICO score. Of course, paying bills on time is a no-brainer, but the following are some others that might help.
- A mortgage is the most important loan when managing a FICO score. Having it paid on time each month is a big must.
- Installment loans for things like furniture, appliances, etc. come in second.
- Keep amounts borrowed well below credit limits. Maxed out credit cards makes lenders nervous.
- Limit credit cards to three. More will decrease a FICO score, and again, make lenders get the jitters.
- Don’t apply for too many credit cards at one time.
- A permanent address, preferably an owned home, will help in FICO scores. Moving from place to place will lower it.
The importance of having a good credit rating will decide how well life can be lived. FICO scores establish more than just whether one can obtain credit, they also determine interest rates, down payment amounts, which mortgage can be used when buying a new home, the ability to get a car loan, premiums on auto and homeowners insurance, and how well one will be accepted into the workforce.