Knowing Your FICO Score is a Key Component to a Solid Financial Plan
Money Management Series
- This is Your First Step to a Successful Money Management Plan
- Knowing Your FICO Score is a Key Component to a Solid Financial Plan
- Evaluate Your Financial Situation and Make Changes Where Needed
Our first post in this series covered how developing a budget is the first step toward a successful money management plan. The second, and almost as important, step is knowing your FICO score, and what it means with regard to your personal finance plan.
The FICO Score
The FICO score can have a significant impact on every part of an individual’s life. Knowing your FICO score and taking steps to improve it, if needed, is essential to getting/keeping your fiscal house in order.
If you don’t know your FICO score, now’s the time to get it.
Getting Your FICO Score
The website annualcreditreport.com is the only authorized source to get your free annual credit report under federal law (per the Federal Trade Commission). Here is the link to the FTC’s website on which you’ll find information on getting your credit reports and the link to do so.
While the link will get you your detailed credit information (Credit inquiries associated with your name/SSN, all of the accounts you have open, the payment histories associated with each account and the amounts owed on each account) it will not get you your FICO score.
Equifax and TransUnion both require payment to actually get your FICO score. Experian, however, allows you to sign up, free of charge, to see your FICO score. Just be aware there will be plenty of sales pitches within the Experian process. But to get access to, and check as often as you please, your FICO score…that’s absolutely free. Which is why I use it.
Additionally, there are two online options for checking a close approximation of your FICO score…otherwise known as a FAKO score…Credit Karma and Credit Sesame. You’ll need to create accounts for each and input personal information so that your credit information can be accessed to provide you your FAKO score. Both have been around for a while and are as safe as any online repository can be. I have used both for years without issue.
And, over the past few years, more and more credit card companies have begun offering FICO scores to cardholders for free. American Express, Chase, Citibank, Barclays, Discover and Capital One provide cardholders free FICO/FAKO scores. If you have a credit card from a major bank, sign in to your account to see if this benefit is available to you.
Obtaining credit/FICO information is fairly easy these days, so utilize the information provided above to become better educated about your specific credit situation.
What is the FICO Score?
Now that you know your FICO score, let’s get specific about what that number is and what it means.
This is from the website myfico.com –
What’s in your FICO score? FICO scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages reflect how important each of the categories is in determining your FICO score.
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%
These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit very long – the importance of these categories may be somewhat different.
The myfico.com information shows what goes into calculating your FICO score, but how is that three-digit number used and how does it affect your life?
Well, the most obvious way the FICO score is used, and thus affects your life, is to determine future risk based on credit report data. For example, say you want a car loan. Once you’ve completed the application, the salesperson will take your information and run a credit check. This check will provide your FICO score. If the score is high enough, you’ll not only be approved for the loan, but you’ll also be approved for the best interest rate available. If your score is average, you’ll likely be approved for the loan, but your interest rate may be higher than if you had a stellar FICO score. And if your score is not very good, you could be denied a loan altogether.
There are other things that are looked at when you are being considered for a loan, such as the amount of debt you can reasonably handle based on your income, your employment history and your credit history. The FICO score is a large part of it, though.
These principles are the same for all sorts of loans, be they mortgages, home equity or personal loans. The bottom line, the lower your FICO score, the more interest you’ll be paying and the higher your monthly payment for that loan will be. The goal: as high a FICO score as possible so you can get the lowest interest rate and thus get to keep more of your money each month.
Okay, so a high score is best, middle score is okay and a low score is bad…but how does that translate to the three-digit number I’m looking at? Well, I wish there was a concrete answer for that, but there’s not. Here is a general guide, however. Credit scores usually fall in a range of 300 – 850. Below is a chart to get a general idea of where your FICO score may fall and what it means.
Credit Score What it Means
760 – 849 Excellent score. Lenders will likely offer you the best interest rate.
700 – 759 Great score. It should be no problem to get a loan at a good interest rate.
660 – 699 Good score. You still should be able to get a loan at a good interest rate.
620 – 659 Fair score. You should qualify for a loan, but the interest rate will not be the best.
580 – 619 Poor score. You may qualify for a loan, but the interest rate will be extremely high.
500 – 579 Very poor score. If you qualify for a loan, the interest rate will be extremely high.
While determining eligibility for credit is a big part of the FICO score, it is also used for other things that affect your life.
When applying for jobs, prospective employers may run a credit check. Many employers will do this if the applicant will be working around money or dealing with financial matters, but others may perform the check solely as a way to consider how risky the applicant may be.
Additionally, car insurance rates are many times based, partly, on your FICO score. Again, the FICO score is used as a determiner of future risk. That risk can be financial, but insurance companies also use it to determine how much risk a person might take in general. The lower a FICO score, the more likely that person may be to drive fast or more recklessly and, in turn, file more claims.
These uses of the FICO score are definitely controversial. The matter of whether or not insurance companies should be able to base insurance premiums on an individual’s FICO score has been debated by lawmakers throughout the U.S. The same holds true for the consideration of employment. The bottom line, however, is that the FICO score is part of the consideration process for things not directly related to credit.
That is why it is so vital that personal finance matters, specifically those dealing with your credit reports and score, be taken seriously. The consequences of bad credit can haunt you in ways far beyond just being able to get a good interest rate on your next car loan.
Boosting Your Score
If your FICO score could use some boosting, here are the areas on which you want to focus.
Make all loan payments on time – On-time payments alone account for 35% of your FICO score. Making payments on time will boost your FICO score.
Pay off your debts (or pay them down) – The amounts owed, especially when viewed as a percentage of outstanding credit, can weigh down your FICO score. Ideally, you want the amounts owed on credit cards to be 10% or less of your total credit limits. When it grows above that, it will begin lowering your FICO score.
These two factors play the biggest role in an individual’s FICO score. Over time, on-time payments and a low credit utilization rate (10% or less) will increase a FICO score.
Additionally, keeping older credit card accounts open – preferably with little to no balance on them – will help keep a FICO score higher by virtue of a longer credit history.
If your score is low due to a bankruptcy, or mismanagement of credit over the years, it likely will take time to boost your FICO score.
But following the on-time payments and lower credit utilization rate plan should gradually increase your FICO score over a year or so period.
Wrap Up
I know this was a lot of information to digest.
But the FICO score is a vital piece to any money management plan.
Because it affects so many financially-related areas – the ability to get a loan, the interest rate paid on the loan, car insurance rates, and even the ability to get a job – knowing the intricacies of the FICO score is a must when working to get, and keep, your financial house in order.
credit image courtesy of Stuart Miles at freedigitalphotos.net
