Your FICO credit score is one of the most common ratings used to determine your creditworthiness. Let’s break down how it’s calculated.
Consider your credit score like a passport for your financial life—it helps you make financial moves like buying a car or a home, or paying for college with student loans. With a good score, these big financial moves will come easier and cost you less because you’ll be able to qualify for better loans with lower interest rates. A solid score can give you financial confidence—the peace of mind of knowing that you are in good financial standing.
Your credit score is based on your credit habits. There are different companies that review your credit history and provide a score to lenders for their consideration, and one of the most commonly used is your FICO credit score.
Here are the five components that make up your FICO credit score along with tips on how you can improve in each category:
The 5 factors that influence your credit score:
1. Payment history
Making consistent, on-time payments is critical. A missed payment can stay on your report for 7 years. Set up automatic payments or due date reminders.
2. Amounts owed
The more you owe, the more it can affect your score. Reducing your outstanding debt is the quickest way to improve your score. Keep your “credit utilization” low by not overusing credit cards.
3. Age of accounts
Lenders look at the average age of all your accounts combined. The longer you successfully maintain an account, the more it helps.
4. New credit applications
“Hard inquiries” can temporarily drop your score when applying for loans. Space out new credit applications to avoid negative consequences.
5. Types of credit used
Lenders like to know you can handle different types of credit. Student loans, a mortgage, auto loans, and credit cards can all build credit. Using just one type of credit or not having any history limits your score.
If you need to improve or repair your FICO credit score, your first step should be to check your credit report for errors. You can request a free copy of your credit report from all three credit bureaus once a year at annualcreditreport.com. If you find any errors, dispute them directly with the relevant credit bureau. Then, get to work on boosting your score by practicing good credit habits.
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