Understanding and Managing Your Credit Score

Understanding and Managing Your Credit Score

Your credit score is a number that lenders use to gauge how likely you will be to repay your debts on time.

As an informed consumer, you can make yourself more attractive to lenders by taking steps to boost your credit score.

Your FICO® Score: The Standard Measure

The FICO® Score (an acronym for its creators, the Fair Isaac Corporation) is a standard gauge lenders use to measure a consumer’s credit risk. According to myFICO.com, 90% of top lenders use FICO scores when making lending decisions. A typical credit score will range between 300 and 850 points. Although all lenders make decisions based on the particulars of the lending situation, generally speaking, the higher your credit score, the lower the perceived risk to the lender, the more attractive the interest rate you may be offered, and the more money you may save over time.

For instance, at current rates, a borrower with a credit score of between 760 and 850 can expect to pay a rate of 3.174% on a 30-year, $200,000 fixed-rate mortgage, according to myFICO.com’s Loan Savings Calculator. By contrast, an individual with a score of between 620 and 639 can expect a rate of 4.763%, which amounts to an extra $183 in monthly payments and an additional $65,797 in total interest paid over the life of the mortgage.1

Key Factors

The three major credit reporting agencies — Equifax, Experian, and TransUnion — compile credit scores based on information provided by creditors. These agencies generate scores using a proprietary formula that assigns weightings to five main factors:

  • Payment history (whether you have missed or been late with any credit payments). On-time payments are an important component of your credit score. Using your credit responsibly and paying bills on time are great ways to maintain a good credit score.
  • Credit utilization. Credit utilization is defined as the total debt you have divided by the total available credit that is available to you. High credit utilization can be a warning sign of credit risk.
  • Length of credit history (how long various accounts have been open). Credit history is a significant component of your credit score. Accordingly, the average age of your credit cards can be a strong indication of your credit history. Care should be used in keeping old accounts open and in good standing.
  • The amount of new credit on your record. While opening one new credit card might be normal, opening several in a short span of time could be a warning sign to potential creditors that something is amiss in your financial life.
  • Mix of credit accounts. Both the total number of credit accounts you have and the mix of credit you have will affect your credit score. A healthy mix of revolving credit cards, charge cards, installment loans and mortgages will also impact your credit score.

What’s in a Score?

The percentages in the chart below reflect how important each of the five main categories is in determining how your FICO score is calculated.

Source: myFICO.com (Fair Isaac Corporation), retrieved April 2016.

©2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

1Source: myFICO.com. Interest rates as of October 17, 2016. The rates shown are averages based on thousands of financial lenders, conducted daily by Informa Research Services, Inc.