Financial Tools & Calculators
It’s important to obtain copies of your credit report from the three major credit bureaus and review them for accuracy, but if you want to know how a potential lender views you, it’s important to know your credit or FICO score. FICO comes from the Fair Isaac Company, which came up with the process of condensing all of your credit information into one three-digit number.
Three quarters of all lenders use FICO scores when considering requests for loans or credit.
The importance of your FICO score doesn’t end there. It’s also used in determining your interest rate, the amount of your down payment and the variety of mortgage types available to you if you’re buying a house, your ability to get a car loan, the premium on your auto or homeowners insurance, and even your ability to get a job.
If your FICO score is on the low side, you’ll pay a higher interest rate on loans and credit cards.
To get the best interest rates, your score should be 720 or above.
FICO scores range between 300 and 850. Ratings are as follows:
Excellent: Over 750
Very Good: 720 or more
Acceptable: 660 to 720
Uncertain: 620 to 660
The formula used to calculate your FICO score includes information based on several factors:
35% on your payment history
30% on the amount you currently owe lenders
15% on the length of your credit history
10% on the number of new credit accounts you’ve opened or applied for (fewer is better)
10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)
The best way to improve your credit score is to pay your bills on time and manage your credit wisely. The most important item is your mortgage. Make sure you pay it on time every month. Installment loans, where you borrow a set amount to buy new furniture or appliances, for example, are given more weight than credit cards.
Keep your borrowing well below your credit limits, because your FICO score will be lower if you are maxed out on your credit cards. Don’t have more than two or three credit cards because a large number of credit cards also lowers your FICO score. Don’t apply for several credit cards at one time; it makes lenders nervous and will lower your FICO score. Other factors also affect your score, such as home ownership, which raises it, and moving frequently, which lowers it.