What’s A Good Credit Score? The Importance Of Your Credit Score, How To Check It, And How To Improve It

What’s A Good Credit Score? The Importance Of Your Credit Score, How To Check It, And How To Improve It

What’s A Good Credit Score?

According to MyFICO.com (the official website of Fair, Isaac & Co., creator and proprietor of the FICO score), the magic number for a credit score is 760, because in a “Loan Savings Calculator” on their website, the [760-850] bracket is the one that gets you the best possible rate on a loan (and truthfully, any other form of credit).

To make a long story short, there are what we might call “generally accepted brackets” that are used by financial institutions to determine the quality of a given credit score. The score that’s most widely used by financial institutions is the FICO score, so it’s the one that should matter to you.

The FICO score is “a number that is formulated based on your credit history helping lenders evaluate your credit risk. Your FICO® score is used to determine credit offers and interest rate.”

Ranging from 300 to 850, the FICO score is pretty much a number that sums up (in the eye of a financial institution) what kind of financial risk they’re taking by having you as a customer. The higher your score, the better a customer you are perceived to be. Here’s how the data that shows up in your credit report factors into the calculation of your credit score: (source: MyFICO.com)

Payment History (35%)

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
• Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due)
• Amount past due on delinquent accounts or collection items
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
• Number of past due items on file
• Number of accounts paid as agreed

Amounts Owed (30%)

• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History (15%)

• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity

New Credit (10%)

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems

Types of Credit Used (10%)

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Please note that:

• A FICO score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.
• The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.
• Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
• Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.

Importance Of Your Credit Score

The days where you could have access to credit no matter how bad your credit score is are seemingly over (at least they’re over for now). Banks and other financial institutions have considerably tightened up their requirements for approving credit cards, loans, and other forms of credit, even going as far as closing the accounts of those clients they perceive to be more of a risk than a profitable relationship, or relegating them to second chance credit cards products.

So it becomes essential to manage your credit score and make sure it’s “good”. Some will counter that since they’re not planning to apply for any new cards or new loans, it doesn’t matter. Well it does! Almost everything you do that has a financial side will be somehow tied to your credit score: looking for a new job, looking for a new apartment, getting insurance coverage, and so on. Most of these people/companies won’t give you their best deals unless they’re satisfied with your credit score.

How To Check Your Credit Score

As of January 2011, you have the right to receive your score for free any time a lender makes certain kinds of decisions — e.g., if you’re given credit on less than the most favorable terms a lender offers. The new federal regulation, which took effect on January 1st, requires that credit card issuers and other lenders provide applicants with the reasoning behind the interest rate assigned to the new credit card or loan.

This does not apply to applicants who are turned down entirely for a new credit card or other loan. Other relatively new federal rules permit those people to check information on the credit report that was used to deny them the loan.)

For a fee, all the major credit bureau allow you to check your credit score.

How To Improve Your Credit Score

First, pay your bills on time. Payment history is a whopping 35% of your score.

Second, don’t get close to the edge: “Don’t use more credit than you really need.”

And third, don’t apply for new credit unless you absolutely have to.

Having a good credit score can really save you a lot of money. Here’s a table from MyFICO that shows how much you’d be expected to pay every month on a $300,000 mortgage depending on what bracket your score falls in:

FICO Score	APR	Monthly Payment
760-850	4.376%	$1,498
700-759	4.598%	$1,538
680-699	4.775%	$1,569
660-679	4.989%	$1,608
640-659	5.419%	$1,688
620-639	5.965%	$1,792

Being in the 760+ bracket translates into a $300 savings compared to being in the 620-639 bracket. That’s a lot of money.

What’s A Good Credit Score? The Importance Of Your Credit Score, How To Check It, And How To Improve It