Are you as confused as most people when it comes time to understand what your credit score means? It can be a little difficult to figure out what the numbers mean, and more importantly, how the credit bureaus use these scores when you need credit. Here is some help in understanding the process as well as some tips on improving your credit rating.
Credit scores, or FICO scores as they are also known as, are numbers that are assigned to you based on your credit history. FICO is short for Fair Isaac and Company.
The information that is used in determining your FICO score comes from a variety of places including the major credit bureaus, credit card companies that have issued you a credit card, banks and other financial institutions where you have loans, and other data bases that have consumer data on them.
The numbers are added up and your score is the determining factor in whether you qualify for low cost credit, higher risk credit, or no credit at all.
The way the scoring range works, the higher your numbers are, the better your credit is. This translates into lower interest rates on loans or other credit items.
On the other hand, if you have a low score you will pay higher interest rates, or possibly be turned down completely.
Generally speaking, FICO scores run from the 300 point range all the way up to 850 points. These points are then separated into point groups as follows:
720 – 850
700 – 719
675 – 699
620 – 674
560 – 619
500 – 559
Anything below 500 will usually be declined credit, or be forced to pay extremely high interest rates. These six point groups are used by all the major credit card issuers, auto finance companies, and mortgage companies.
Naturally, the very best interest rates and prime lending goes to those in the top category. Although most consumers fall into the middle ranges, there is a lot of competition among credit card issuers, which means you can still get some very good deals.
So, how do you improve your credit score? First, let me be clear in saying that there is no overnight magic solution to adding 100 points to your credit score. It will take a little time, but you can make some dramatic short term improvements.
1. Open up a savings account if you don’t already have one. Even if you can only begin with $100, it can add 30-40 points onto your credit score.
2. Pay your bills on time. Did you know that 35% of your FICO score is base on payment history? The more frequent you pay your bills on time, the more your score will rise.
3. Don’t max out your credit cards. Having a 50% balance is optimum. It shows you’re responsible and able to handle credit cards.
4. Don’t open a lot of new credit card accounts. This may seem like a good idea, but financial institutions look at it differently. It sets off all sorts of red flags.
5. Check your credit report frequently and correct any errors. Many times people will have an error on their credit report that is adversely affecting their credit score.
Now, the next time you hear someone say their credit score is 605, you’ll better understand what they are talking about, and perhaps offer them some suggestions in being able to raise it.
