What is a FICO^® Score and how can you improve yours?

Do you know your FICO^® Score

For a three-digit number, your Fair Isaac Corporation, or FICO^® Score carries a lot of weight. From applying for a new credit card with attractive rewards, or a personal loan to cover a large expense, to getting a mortgage for a house or taking out a private student loan for college, your FICO^® Score plays a key role showing banks and other lenders that you’re a creditworthy individual who can take on the financial responsibility of borrowing money and paying it back. Having a good FICO^® Score can qualify you for better borrowing terms and ultimately save you money.

Your FICO^® Score is one of the most important numbers associated with your finances. As a result, you’ll want to make sure that you’re aware of your FICO^® Score and also practicing positive behaviors that can help you build and maintain a strong one.

For some young adults, FICO^® Scores may not be top of mind. According to Sallie Mae’s “Majoring in Money 2019” research, which explored the financial habits of young adults ages 18-29, college students were the least likely to be aware of their FICO^® Score, to have viewed their credit report, and to identify which behaviors could have a positive or negative effect on one’s score.

To help get you familiar with FICO^® Score and set you on the path to building a good credit profile, let’s break down what you need to know:

What is a FICO^® Score?

Your FICO^® Score (i.e. your credit score) is a measurement of your creditworthiness. It informs lenders, such as banks and credit unions, about your ability to take on debt and pay it back. In general, the better your score, the better you’ll look to lenders when you’re applying to borrow money.

A FICO^® Score is a number, generally between 300-850, with 300 representing the poorest FICO^® Score and 850 representing the strongest. According to the credit reporting agency Equifax, a good FICO^® Score is generally considered to be in the range of 670-739, with scores between 740-799 viewed as very good, and scores above 800 valued as excellent. Although there are a few different credit score models out there (e.g., VantageScore), FICO^® remains the most commonly used, with over 90% of U.S. lending decisions referring to that model.

In reviewing your FICO^® Score, lenders can see your borrowing history and estimate your credit risk—in other words, how likely you are to repay your debt.

Specifically, your FICO^® Score is determined by five key components:

1. Payment history (35%) – How successful you’ve been in paying credit account bills on time
2. Credit utilization (30%) – The amount of credit and loans you're borrowing compared to the amount of credit you have available
3. Length of credit history (15%) – How long you’ve had credit
4. New credit inquiries (10%) – Frequency of credit inquiries and new account openings
5. Credit mix (10%) – The various types of credit you have, which can be a mix of credit cards, installment loans, student loans, auto loans, and real estate loans

What are the benefits of having a strong FICO^® Score?

From having access to the best interest rates, to getting approved for credit cards with competitive perks, there are a lot of attractive benefits to having a good FICO^® Score. Here are a few to keep in mind:

• You can get approved to borrow money. As we previously discussed, a strong FICO^® score increases the chances that a lender will approve you for a loan. Whether that be for credit cards, mortgages, personal loans, or private student loans, banks will have a higher confidence in lending money to someone who has a high FICO^® Score that exhibits strong creditworthiness over someone who does not.
• You can lower the total cost of borrowing. Having a very good FICO^® Score can help you lower the total cost of borrowing by qualifying you for lower interest rates. Having a lower interest rate, even just a few percentage points, can significantly save you money over the lifetime of your loan.
• You can qualify for attractive credit card benefits and rewards. We’ve all heard about credit cards offering enticing cash back offers, travel points, and other exclusive perks. By having a very good FICO^® Score, you can increase your chances of qualifying for cards that offer these amazing perks!
• You can qualify to rent an apartment. With apartment hunting so competitive, some landlords place strict limits on the lowest credit scores they’ll accept – making it more important to have as strong of a FICO^® Score as you can. By making sure your FICO^® Score is in very good standing, you can increase the chances that your rental application is accepted and make the whole process easier.

So, now that we’ve run through what a FICO^® Score is, why it’s important, and the benefits of building a very good one, let’s break down how you can quickly check your score and credit report to see where you currently stand.

How do you check your FICO^® Score and credit report?

Checking your FICO^® Score has never been easier! First off, most credit card companies and banks provide you with instant and free access to your FICO^® Score—usually in the form of a dashboard widget or icon when you log in to your account. From there, you can simply click to view your current score, see what is affecting it, and even things you can do to improve it.

Additionally, you can access your free FICO^® Score and credit report online via any of the three main credit reporting agencies: Experian, Equifax, or TransUnion. Different from your FICO^® Score, your credit report is a full summary of how you’ve managed your credit and debt accounts. You’re entitled to one free copy of your credit report every 12 months from each of the three credit reporting agencies, your report may not be the same across all three (as they can vary based on the scoring model used).

Overall, get in the habit of checking your FICO^® Score often to make sure you’re aware of where it stands, and learn what steps you can take to improve it!

How to improve your FICO^® Score

As you take on new debt, make credit payments, and continue to establish your creditworthiness, your FICO^® Score is always changing. Therefore, you’ll want to make sure that you’re practicing good behavior. Here are a couple of things you can do right away that can set you on the right path toward improving your FICO^® Score:

Pay your bills on time

Your payment history makes up 35% of your FICO^® Score, so making sure that you pay your credit and bills on time is a big deal. Late payments on things like credit cards, mortgages, auto loans, or student loans can significantly impact your score. Fortunately, there are several things you can do to make sure that doesn’t happen and that you pay your bills on time.

A great way to make sure that you never miss a payment is by enrolling in automatic payments. That way you'll know that you’ll likely not miss payment due dates, suffer any late fees or penalties, or lower your FICO^® Score. In fact, some lenders may even reward customers for enrolling in automatic payments. For example, Sallie Mae offers qualifying borrowers a 0.25% interest rate reduction on their private student loans for enrolling in auto debit.

Alternatively, you can enroll in monthly payment reminders so that you're always notified about upcoming payment due date. However, since these are just reminders, you’ll still need to make sure that you go into your account and pay your statement balance before your bill is due to avoid any late fees, penalties, or negative affects to your FICO^® Score.

If for some reason you miss a payment, focus on quickly paying that debt to avoid any further late penalties.

Work on reducing large amounts of debt

The percentage of credit that you’re utilizing compared to your total credit limit makes up 30% of your FICO^® Score.

In general, the best way to improve your score in this area is to work on reducing the amount of debt you currently owe and always try to keep your outstanding balances below 30% of your total credit limit.

By continuing to pay down your existing debt and keeping recurring debt balances low, you can demonstrate to lenders that you're able to responsibly handle debt. Additionally, you can work to increase your total credit limit by asking lenders to consider a limit increase (usually only approved if you have a strong payment history) or opening a new line of credit.

Avoid opening multiple credit accounts at once

While sometimes opening a new line of credit can improve your FICO^® Score (see above), don’t do it too often. Contrary to what some may think, opening new lines of credit for the sake of improving your credit mix can sometimes backfire on your score. For example, while your credit mix accounts for 10% of your overall score, don’t try to open multiple accounts at once to add variety to your profile. Multiple credit inquiries can further hinder your FICO^® Score. Instead, build your credit mix over time and start by focusing on responsibly managing one or two accounts before taking more on.

Check your credit report and dispute any errors

It’s important to review your credit report to make sure it’s in good standing and that there are no unexpected errors driving your score down. Although you are limited in the number of times you can receive your free credit report, be sure to take advantage of this service and check in on your report. And, if you spot any errors that are affecting your score, make sure to dispute them with the credit reporting agency. Doing this can eliminate the error and improve your FICO^® Score.

Since your FICO^® Score is constantly changing as you pay your monthly bills and take on new lines of credit, there are always opportunities to improve it. By having a regular awareness of your score and exercising creditworthy behaviors, you can improve your FICO^® Score over time and enjoy the many financial benefits it has to offer.