What is a FICO score and why is it so important? The FICO (Fair Isaac Corp) is a formula based on multiple factors that results in a score that lenders use to determine your creditworthiness. The higher the FICO number the better your credit.
What are the factors in determining your FICO score? It is a combination of several factors and their respective weighting on your score including;
1. How long you have had credit (15%).
2. New credit (10%).
3. Credit mix (10%).
4. Your amount of credit currently used (30%).
5. Past payment history (35%).
The factors when combined together help lenders quickly determine your ability to repay debt. The scores range from 300 to 850 in general. Different credit reporting agencies may use different versions of FICO but there will be a new FICO 10 which will come out in January. There are different versions used depending on the type of credit you are applying for. There is an Auto Score, a Bankcard Score, and a mortgage version.
The new FICO 10 or 10T (trended), will account for things such as trending history not just a current snapshot. If you credit usage is trending down, for example, that can help your credit score under FICO 10T. Don’t be surprised if you see a slight drop in your score under the new FICO 10 since it considers additional factors.
UltraFICO is also a new scoring system that also takes into consideration your banking history to help people with low or no FICO scores. It tracks your banking history similar to your credit factors.
Credit scores are generally broken into the following groups:
Very good (740-799)
The average score right now is approximately 703 if you are wondering how your score compares. How do you get and keep your credit scores higher? Pay your bills on time since that is the biggest factor. Don’t keep large outstanding balances since that’s the second largest factor in your score. Don’t open a lot of new accounts since “hard inquiries” count too. Don’t cancel old credit cards you don’t use anymore as long as you aren’t paying a fee for them. They help keep your overall usage lower which positively affects your score. No, checking your own credit does not affect your score, so check it at least annually to make sure there are no mistakes on your credit report.
Why does any of this matter to you? Yes, you might get approved for credit if you have a low score, but you will almost certainly pay a much higher interest rate. This could result in tens, if not hundreds, of thousands of dollars in extra interest over your lifetime. Some insurance companies now use your credit score to determine your insurance premiums rates. Why? Because studies show there is a very high correlation between credit scores and insurance claims. Good credit is the easiest way to save money on almost everything you buy.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.