They say money makes the world go ’round. If that’s true then having access to credit is surely the key to doing anything in the twenty-first-century world. Whether you’re trying to get your business off the ground or applying to take out a personal loan online or mortgage, a good credit score is your key to getting the investment you need to make your dreams a reality.
So just how is credit score calculated? And how do you make sure you are maximizing your potential and not making silly mistakes that can work against you.
If you’re trying to get a good credit score than FICO is the organization you want to get to know. It stands for Fair Isaac Corporation, a data analytics company founded in 1956 by Bill Fair and Earl Isaac that devised a rating system for scoring potential borrower’s credit.
This rating system is still used today and rates users from 300-850 in what has become known as the FICO rating.
The aim is to get as close to 850 as possible, with anything over 740 excellent and 650 being the benchmark. A score below 650 and you could be in for some serious hefty interest charges.
How is Credit Score Calculated?
The short and technical answer is it’s a secret. FICO does not reveal explicitly how their calculations work as they don’t want customers to try to game the system. What they do give out is a series of percentages to show you roughly how certain things are weighed when coming to an assessment. They are 30% amount owed, 15% length of history, 35% payment history, 10% types of credit used and 10% new credit.
This gives us a fairly big insight into what FICO is looking for so let’s examine some of them in detail.
Length of History
Did you know if you’ve never had a credit card, taken out a loan or even signed a cell phone contract it can work against you? As mad as sounds someone who has never had any debt is seen as more of a liability than someone who has.
In fact, the average American is in $38,000 worth of debt.
So if you’re looking to boost your credit score take out one or maybe even a couple of credit cards and make some regular payments on them over the course of six months to a year, be sure to pay them back on time. Many of these cards come with perks to incentivize you like free flight miles or a $100 Amazon voucher. This way you have a solid history of paying back your credit on time.
Check out our guide to the best credit cards of 2019.
If you already have thousands of dollars worth of bad credit loan debt that vastly exceeds your stated income then this is obviously a big red flag.
Before you get a FICO score make sure you’ve paid off any debts you have in full.
Types of Credit Used
A diverse credit range is important. If you’ve had several different credit cards, installment loans from banks and mortgages and you’ve paid all of them back on time, this shows to FICO and ultimately to future borrowers that you are someone that multiple lenders have trusted to lend money to in the past and you have paid them back.
One of the biggest factors behind debt and people’s inability to get the types of credit they want is a lack of education but thankfully there are loads of ore resources on the internet to help.
If you’re considering taking out a loan or a credit card and want more details on how is credit score calculated check out our learning center for invaluable help and advice. Here are some other articles you might find interesting: