Your FICO credit score: what it is and why it is it so important.
By Tom Kline, Controller of RK Auto Group, a Virginia car dealer.
Credit scoring is a system lenders use to help determine whether to lend you money. The one most commonly used by lenders is FICO (named for Fair, Isaac, the company that created it). The number indicates to lenders how likely you are to make your payments on time by taking into account the number and type of accounts you have, any late payments in your history, collection actions, outstanding debt, and the age of your accounts.
Having a good FICO credit score promotes your financial health.
Your FICO credit score is computer-generated using numbers from your three credit reports. These are created by the three major credit bureaus: Equifax, Experian and TransUnion. You may have a different FICO credit score for each of your reports. Lenders may use any of those numbers, or take the middle of the three. The final number determines whether or not you qualify for a loan, or other credit, how much they are willing to lend you and at what interest rate. Over time, your credit score can save you (if it’s high) or cost you (if it’s low) thousands of dollars in interest.
You can obtain a free credit report from www.AnnualCreditReport.com or call 877.322.8228. You can also order your credit score through www.AnnualCredit Report.com – depending on which of the 3 credit bureaus it comes from, the cost is between $5 and $8 apiece.
How is your FICO credit score calculated?
- Payment history. It’s 35% of your credit score. A history of late payments on several accounts causes more damage than late payments on a single account. If you run into problems, the best self help credit repair is on time bill payment.
- Amounts owed. Are you maxing out your credit? 30% of your credit score is based on what you owe. Certain types of loans boost credit scores—for example, paying down car loans. Owing a large amount on your credit card doesn’t automatically translate into a lower credit score, but late or missed payments will.
- Length of credit history. 15% of your credit score is determined by how long you've been using credit. Generally, older accounts equal higher scores, as they demonstrate responsibility in paying off debt.
- New credit. Opening several accounts simultaneously lowers scores. However, you won’t be penalized for rate shopping (example: car loans) in a short timeframe.
- Types of credit used. Using (or overusing) various credit lines impacts your score, as will the type of credit, such as a home equity line or credit cards. Paying down installment loans, say on a car or furniture, is a good sign that you are capable of managing and repaying debt. Virginia car dealer RK Auto Group created a Financing Program that can help customers rebuild their credit.
Improving your FICO credit score with a bit of self help credit repair could add up to a small fortune over time.
Whether you’re buying new or used cars, a house, or applying for any type of credit, your FICO credit score has a direct impact. The higher your score, the lower your interest rates will be; lower score, higher interest rates. See dramatic interest rate comparisons in Part 2: FICO credit score. If you’re ready to start improving your credit score now, see Get self help credit repair tips from Virginia car dealer RK Auto Group.
Tom Kline is Controller of Virginia car dealer RK Auto Group (RK Buick, RK Chevrolet, RK Subaru, RK Scion, and RK Toyota). RK Chevrolet is the recipient of Chevrolet Motor Division’s coveted Service Supremacy Award four years in a row. This is an award which less than 400 of the nation's 5,000 Chevrolet dealers have won. RK Auto Group has been included in the Ward’s Auto list of top 500 U.S. car dealers, and has received the prestigious "Genuine Leaders Award" for excellence in sales, service, and customer satisfaction. The dedication of each employee at RK Chevrolet, RK Buick, RK Subaru, RK Scion and RK Toyota made these awards possible.
