Usually our conversations here are limited to getting away from credit but I want to talk about something you cannot ignore which is your credit score or its official name the FICO score more important we’ll answer the question: What’s a Good Credit Score? FICO is a reference to the company that manages the reporting which is the Fair Isaac Corporation. Now it’s easy to think that since I don’t want to take on any form of debt it’s safe to ignore my credit score but it’s not that simple. More and more employers, landlords and insurance companies check your FICO score as part of their review process which could keep you from landing a job, renting an apartment or getting a good rate on your various forms of insurance.
What’s the FICO Credit Score Range?
They start from a low of 300 to a top score of 850. More than likely your credit range will fall in the 600 to 700 range assuming you don’t have any form of catastrophic credit event.
What’s the FICO Score and How is it Calculated?
The FICO score is simply a number representing your life as it relates to debt and debt instruments. It’s a private algorithm that is closely guarded but there is general information available as to how it’s calculated. Like it or not it’s the indicator of your creditworthiness. The credit score is calculated using five key categories. See our pie chart for the breakdown.
What the Numbers Mean
35% of your Credit Score is devoted to Payment History. This would include missed payments, collections, bankruptcies and the like. The older the information the less of an impact on your overall score.
30% of your Credit Score is based on Utilization. This is the amount of credit you have in used as compared to your available credit. The recommendations point to less than 10% of your available credit be utilized.
15% of your Credit Score is impacted by your Credit History. Effectively how long you’ve had accounts open and obviously takes some time to build.
10% of your Credit Score is based on Inquiries. If you apply for various forms of credit and then don’t get that credit it will impact you negatively. Checking your own credit does not impact this number.
10% of your Credit Score is determined by Types of Credit. This would be different forms of credit such as mortgages, auto loans, revolving credit and installments.
Is something Missing? You’ll note that there is no consideration for your actual income in this model. Interesting to say the least.
What’s a Good Credit Score?
The short non-scientific answer is 760 or above. That’s going to get you the best interest rates possible on a mortgage or many other forms of credit. Obviously that number can be somewhat dynamic and depends on what the lender’s guidelines dictate. A report from myFICO shows the impact your credit score can have on your potential mortgage rate.
|If your FICO score is...||Your interest rate is...||And your monthly payment will be...|
Can I get my FICO Credit Score at AnnualCreditReport.com?
Unfortunately no. AnnualCreditReport.com is the free service that will allow you to pull 1 credit report from each of the 3 consumer credit reporting agencies: Equifax, Experian and Transunion. It will give you a list of your credit history showing current and closed accounts and your payment history. You absolutely should take advantage of this free service to manage your financial respectability but this is not the information that lenders use to make their decisions alone. It’s most heavily influenced by whether or not you have a good FICO credit score.
So Where Do I get my Fico Score?
myFICO is the official site run by Fair Isaac Corporation where you can order an individual FICO credit score from either Transunion or Equifax. Yes each of the credit bureaus maintains their own credit score although they should be very similar. Depending on how paranoid you are it may behoove you to get both of them. And for whatever reason Experian has their own reporting info although they won’t directly identify it as a FICO score but you can purchase from their site.
Monitoring your history on a weekly basis
If you are getting ready to take out a mortgage or other event where a high credit score is critical to a low rate or getting approved at all then it might make great sense to subscribe to ScoreWatch by myFICO so you can be apprised of any changes to your score each week. You can setup thresholds to have it alert when you reach your goal or find out when you might qualify for a better rate. It will also alert you if you’ve had a negative event on your credit report. It will even go so far as to send you a text message when your score changes. Probably the most valuable part of the whole membership even if you just do it for a month is the Score Power report. It gives you a full run down of your credit report, your credit score, access to the FICO score simulator and provides information regarding specific items that may be impacting your score.
Why Should I Care?
I hope to be at a point someday in the not too distant future where I don’t really care if I even have enough credit history to generate a report. At that point in my life I won’t be too worried about paying slightly higher rates for car insurance or whether a potential hiring manager is put off by my credit score. But I live in the real world of today where these differences are important. There are certainly ways to get around a bad credit score but it will make your life more difficult to be sure. There is a new book out called “How to Live Well with Bad Credit” and I just reviewed it, if you are in this place there are plenty of great tips in there for you. Best wishes to you navigating these tricky waters and here’s to reaching that place in life where we can happily kiss credit and the FICO score goodbye.
Picture courtesy Vintage85