Credit Smart

Unit 3: Understanding Your Credit Score

When it comes to getting a loan, it’s your credit score that is used to determine interest rates.  The most common scoring system, Fair, Isaac and Company (FICO), is used among all creditors and credit bureaus; most creditors and credit bureaus either use the FICO scoring system or have a system based on the FICO model.

Factors Used to Calculate Your Credit Score

A credit score is a number that reflects your ability to manage credit—or the risk involved in making a loan. In understanding how scores are calculated, we will review the FICO Beacon score and factors used to calculate your credit score; the same factors are used in all three models.

FICO Scores

FICO Scoring Range 300-850 Points 

  • 300 Baseline Points
  • 193 Payment History
  • 165 Outstanding Debt
  • 82 Credit History
  • 55 Credit Inquiries
  • 55 Types of Credit

= 850 Total Points

Improving Your Credit Score

Credit scoring is not static, it changes monthly.  Even if you have poor credit or are looking to rebuild your credit, following a few simple steps can improve your credit score.  The secret is in understanding how scores are calculated.   Here are some things that can help you build a strong credit history and improve your credit score:

  • Payment History: Always pay credit cards or other loan payments on time. One late payment can drop your score as much as 20 points. 
  • Outstanding Balances: Reduce your debt amount. Never carry more than 35% of your outstanding card balance. 
  • Credit History: Pay off your credit cards rather than transferring balances. Do not close accounts older than 7 years that are in good standing—it will lower your score.  And do not open and close accounts, it will hurt you score.
  • Credit Inquiries. Do not sign up for credit offers that you do not plan to use. More than 4 inquiries in a 3 month period will lower your score.
  • Types of Credit. Having both an installment loan and a revolving loan will help build credit.  Do not have more than 1-3 revolving accounts or credit cards.

According to FICO, here are a few examples of what can increase your score: 

  • Paying your bills on time for 6 months.  This could raise your score more than 20 points.  If your FICO score is 690 it is now 710. 
  • Paying down the balances on your credit cards by 35%.  This could raise your FICO score more than 20 points. If you owe $2230, paying $780 alone will raise your score.

Decrease your scores by:

  • Missing monthly payments.  Not making payments on time could decrease your score by 75-125 points.  If your FICO score is 650, it will now lower to 575.
  • Maxing out your credit cards. If you are close to your credit limit, your score could decrease 20-70 points.  If your FICO score is 650, it will now be 580. 
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