Your 3-digit “FICO” credit score is one of most important measures of your financial wellness. But what determines your score and how can you improve it? Your score is commonly used by creditors to determine your overall credit risk when you apply for a loan. Potential employers and landlords also often check your score.
The top three credit bureaus in the U.S. (Experian, TransUnion and Equifax) calculate your FICO score. The better your credit score, the more likely you are to have your loan approved and receive lower interest rates. Generally, lenders regard scores of 670 and above as good credit risks.
To create your credit score, FICO looks at these five factors and weighs them by a certain percentage. If you’re trying to improve your FICO score, focus on one or more of these areas:
Payment history: 35%.
This component of your FICO score is the most heavily weighted. The best way to manage it is simple — pay your bills on time and get current on any past due accounts. If you can’t, don’t hesitate to talk to your lender and work something out.
Amounts owed: 30%
Since this component is also highly weighted, it’s important to keep your credit card balances low as a percentage of your credit limit. Generally speaking, a balance of 30% or lower is considered best. For a card with a $10,000 limit, make sure any balance you have is no more than $3,000.
Length of credit: 15%
The longer your track record of maintaining good credit and paying back loans and credit cards on time, the better. If you are younger, start building credit as soon as possible. Consider keeping current accounts open — even if you currently have a zero balance.
New credit: 10%
You should avoid opening too many new accounts to take advantage of special offers such as airline miles or cashbacks on purchases. Having too much credit capacity can actually make you more of a credit risk.
Type of credit: 10%
Managing a variety of loan types can get you a higher FICO score. Lenders will consider you an experienced borrower if you have, for example, a mortgage, a car loan, a couple credit cards and a student loan. If all you have is credit card debt, you will be considered inexperienced and score lower.
TACTICAL TIP
One way to make sure your payments are on time is to set up automatic payments, or set up electronic reminders.
If you’ve missed payments, get current and stay current!
To learn more about how to improve your FICO score, go to myFICO.com.
Source: myfico.com/credit-education
This material was prepared by LPL Financial, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. LPL Financial does not offer tax or legal advice.
This material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.
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