A snapshot of how credit works.
Keeping a great credit score is the best way to save money on your mortgage, car loan, credit cards, and other interest rates, and it can take a lifetime of responsible financial choices to achieve that.
Unfortunately, there isn’t just one credit score because there are several credit reporting agencies, each with their own scoring model and number range. Some go as high as 990, but the scoring system used by FICO (the Fair Isaac Corporation) is most popular. FICO scores range from 300-850 and a 680 is considered good and above 720 an excellent credit score.
Can you explain FICO and the credit bureaus?
People sometimes get confused as to the different entities that are involved with your credit reporting and scoring, so we’ll clear it up here. FICO is the Fair Isaac Corporation, which is the main credit reporting company. But three credit bureaus report collect your data and report it to FICO: Equifax, Experian and TransUnion.
What determines your scores?
Your score is calculated based on these factors:
30% Credit utilization.
We covered credit utilization, which is your ratio of debt.
35% Payment history.
Keeping a track record of paying on time is the most important factor.
10% Mix of credit.
A good mix of quality revolving accounts, mortgage debt, and installment debt, etc.
10% New credit.
Opening new accounts and new accounts deemed risky can lower your score.
15% Length of credit history.
The longer your accounts show a positive payment and use history, the better it reflects on your score.
What is credit utilization and what ratio do lenders want to see?
Credit utilization is the ratio of your total debt compared to your total available lines of credit. As a general rule, you’re advised to keep all of your account balances and revolving debts at or below 30% of your available credit. But that’s just the start, as studies show that you’ll want a credit utilization ratio of 10% or less to achieve a credit score in the high 700’s or even over 800.
How can you see determine your score and see your credit report?
It’s important to make sure that there are no errors on your credit file and everything is in order. These days, you also need to make sure that your identity hasn’t been stolen or compromised, which effects up to 1 in 8 Americans every year. You can receive a free copy of your credit report from each of the three bureaus once per year, or we can easily pull a detailed credit report on your behalf and go over it.
The first step should always be to get a current credit report and review it line by line with us. Remember that there are three major credit bureaus and they each may report different information, so it might be a good idea to check all three. Look for errors on larger accounts first, length of history, payments reporting on time, and that your balances are accurate. Move your way down to the smaller stuff but leave no stone unturned.
How to improve?
It may seem like basic advice, but always pay on time because even one late payment or derogatory item on your credit report can hurt your score on a long-term basis, since they “stick” for seven years. According to FICO, 96% of people with a FICO score of 785 or greater have no late payments on their credit reports, so be one of those people who have a spotless payment history if you want the perfect FICO.
Pay down balances on existing credit cards and lines of credit is a great way to increase your score, too, as FICO calculates a significant portion of your score by your credit utilization ratio.
Keep a good mix of credit. Consumers with FICO scores above 760 have, on average, six accounts that are currently “paid as agreed” and an average of 3 accounts with a balance. Those with a mortgage and installment loan in good standing also show a strong mix of credit use, improving their score. 10% of your credit score depends on your track record with responsibly managing a mix of credit.
If you notice that there is something incorrect listed on your credit report or a duplicate item, you should have it corrected or removed by filing a dispute with the credit bureaus, as is your legal right.
What NOT to do:
Of course you should never pay late or miss payments like we mentioned.
Also, to achieve a great credit score it’s recommended you don’t use too many credit cards because FICO may ding you. Try to use only one or two cards with high balances on a regular basis. Charge cards like American Express may be your best bet, because the balances don’t report to FICO since you have to pay them off in full every month.
But you should use each of your credit cards at least once a month, or else they may be shut down for lack of use, which could inadvertently hurt your score.
Although it may seem like common sense, don’t pay down all of your accounts to zero or even close done old accounts, even if they aren’t active – that could mess with your ratios and actually erase a well-established positive track record of making payments. In fact, most super scorers also have, on average, an oldest account that’s 19 years old. The average age of their accounts is between 6 and 12 years old and they opened their most recent account 27 months ago or more. 15% of FICO’s scoring is calculated by the credit history.
What credit score will give you the best mortgage rate?
Research shows that a score around the 760 mark usually yields the best possible interest rates on purchase and refinance loans. In fact, 32.8 million people have FICO scores between 700 and 749 but there are approximately 70 million consumers with FICO scores above 760. But that’s just base camp on the credit score mountain because roughly 36.4 million people have scores between 750 and 799 and 38.6 million are in the 800-to-850 range.
Only about 1% of people with FICO scores, around 2 million individuals, ever reach the summit with a score of 800-850.
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Do you have questions about getting the lowest possible interest rate on the best mortgage loan? Contact us and we’d love to help you!