Your FICO credit score: What is it and How Do I Improve It?

January 19, 2015 12:00 am

Sean M. Giles

Financial Advisor

Right after our Shred-it event last March, I wrote a blog about cleaning up your personal finances. One of the items I listed was checking your credit report once a year. This time I would like to explain in more detail your FICO credit score and how it can impact you.

Let’s start with a little background. FICO stands for “Fair, Isaac, and Company” and the score was first introduced in 1989. FICO itself is a company started by Bill Fair and Earl Isaac in the mid-50’s and it trades on the NYSE under the symbol FICO. So, if you didn’t get the lower mortgage rate you were hoping for, don’t blame poor old Bill and Earl. Instead, let’s learn more about how it works and where we can look to possibly improve it.

 

Below is a basic breakdown of credit score ranges.

760 – 850: Excellent
720 – 760: Very good
680 – 720: Average – very good
620 – 680: Fair – poor
Below 620: Poor

Many institutions use the FICO score because it’s fairly cheap and (for the most part) reliable. It certainly has its faults and competing services are beginning to make inroads, but it’s still the most widely used.

The higher your credit score, the more likely it is that not only will you get approved for a car loan, but the interest on the loan could be much lower. The ads you’ve seen recently pitching 1.9% for a car loan is how dealerships get folks in the showroom, but to get that rate your credit score will probably need to be 720 or higher. The same rule applies for a mortgage, credit card, or home equity loan. Easy Finance 101: the lower the interest, the less you pay over the course of the loan. The FICO score can even impact your auto insurance rates and landing a potential job. Potential employers can screen applicants using credit reports.

Here are just a few examples of how to try and improve your FICO score and your overall credit report with the three major agencies (Equifax, TransUnion, and Experian).

•    Learn in more detail about how the score works. Check out http://www.myfico.com/ and http://www.usa.gov/topics/money/credit/credit-reports/bureaus-scoring.shtml
•    Limit your hard credit inquires. Anytime you apply for a loan or new credit card it can negatively affect your score. Checking your own credit report does not impact your score.
•    Build a solid credit history with different types of credit, and of course pay it all on time.
•    Check your report at all three agencies and if there are mistakes get them corrected.
•    Credit reports are free, but your FICO score is not. My credit union sends me my credit score from one of the agencies once a month at no charge. Some banks and credit unions are now offering this service. Check with your bank or credit card company to see if it’s offered. Barclays recently started offering it as part of one of its credit cards.
•    Try and keep your debt to limit ratio on credit cards as low as possible. Think 15% or lower.
•    Increase your credit card limit without a hard credit inquiry. You can lower your debt utilization, but you must keep your spending in line.

Other factors do come in to play when applying for credit and/or mortgages, such as employment history, income, size of down payment, etc.  While this is not a one off solution, hopefully I’ve offered additional tools and information to save you money the next time you have to borrow.

Sean Giles serves as Financial Advisor at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at sgiles@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Sean’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.