Everything You Need to Know About Your FICO Score (Including Why You Should Know It)

Mar 21, 2024

It might seem small, but a simple three-digit number often determines your fate when you are seeking a home loan. That’s because your FICO score, which FICO.com claims is used by used by 90% of the top US lending institutions, indicates your risk level for the timely repayment of a loan.

Issued by Fair Isaac Corporation (FICO), FICO scores range from around 300 to 850. The higher the score, the more creditworthy you’re considered to be. Lenders will look at your FICO score to decide if they will issue a mortgage and, if so, will calculate the interest rate that you will pay based on the risk your score indicates.

Sound familiar? That’s because your FICO score is similar to your Equifax and Trans Union credit scores. Like those scores, you should regularly monitor it. You should note, however, that your FICO score may differ somewhat from your Trans Union and Equifax scores.

And like your Equifax and Trans Union credit scores, there are steps you can take to positively impact your FICO score. How? The first step is to understand the five factors that determine your FICO score. They are:

  1. Your Payment History

 One of the most impactful ways to show your responsibility with credit is to always make your payments on time. In fact, roughly 35% of your FICO score is determined by your payment history, so timeliness is key. Even one missed or late payment can lead to a major drop. And it could take several years before a missed payment will drop off your report. Your first step is to make sure you’re in good standing.  If you have a lower score due to missed or delinquent payments, you should work towards creating a payment plan with collections. Then, create a record of timely payments before taking out a mortgage or another loan. You might even want to wait to take out a mortgage after a missed payment drops off your report, because this can help you dramatically reduce your interest rate.

  1. Your Total Debt

Another substantial part of your FICO score – approximately 30% of it – considers the amount of credit, loans, and mortgages you currently owe. It is always a good rule of thumb to only be utilizing 30% or less of your total credit allowances. Maxing out your cards is a surefire way to bring your score down quickly. If you are dealing with high credit utilization, you should consider making extra payments on what you owe before taking out any additional credit.

  1. The Length of Your Credit History

Worth about 15% of your FICO score, lenders look to see if you have a long history of responsibly using credit. The great thing about this part of your score is that, as time goes on, it will generally rise. This is why it’s a great idea to start building your credit history as early as possible.

  1. Your Mix of Credit

In addition to having a long history of using your credit, lenders will want to know that you’ve managed a range of different types of credit. It can be credit cards, auto loans, student loans, and home loans – you name it. While only contributing to about 10% of your total FICO score, using a range of credit and making on-time payments is the best way to raise your score.

  1. Credit Consistency

While having a range of credit is great, you will notice that your score may drop a little when you open a new account. This is a normal part of the credit process, as more credit gives you more exposure which you need to show that you can use responsibly. As a result, it’s important that you do not open accounts just for the sake of having a range of accounts and ready credit. (You especially don’t want to open lots of different accounts all at once, as that action is assigned even greater risk.) Over time, you will take on various loans and cards that will help build up your score. Since this is only a small slice of the pie – in fact, about 10% of it – you’ll see drops in your credit scores when you open a new account before you see a rise again in your scores. It’s also important to not close cards when you don’t have to, as that can also affect your credit score.

Your FICO score is an important part of your finances and should be regularly monitored. You can do it for free through apps like Credit Karma and services like Experian. Some of your credit lenders may even provide the score. You especially want to know the health of your score before applying for a mortgage.

On the other hand, if you are experiencing financial hardship that has impacted your scores, make sure to consult a financial advisor for help improving your FICO score before you take out any new accounts, so you can access lower rates.

If you have any questions about FICO scores and how to access yours, please feel free to reach out to us. We can also refer you to financial coaches and planners as well as mortgage professionals (for a start, be sure to check out Jackie’s List). After all, my team and I are here to help make your home selling or home buying experience as painless and stress free as possible. We also want to help you get the most out of your home and living in the Evanston area. We look forward to the opportunity to serve you.





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