Understanding what a good credit score is and how to improve it is a cornerstone to being financially successful. Good credit will open doors to you in getting better interest rates and even career opportunities.
 
And, the key factor to those opportunities lies in understanding what impact your credit score has on your future.
 
Here, you’ll learn what a good credit score is, what key factors impact your score, how to get a free credit bureau, and action steps to improve your credit score.
 
And, the first key factor is the FICO score.
 

What is a FICO Score? 

Keep track of your FICO credit score if you want to avoid unnecessary fees, qualify for lower interest rates, and have a shot at a meaningful career.
 
The FICO score is named after its creator, the Fair Isaac Corporation, a data analytics company based out of San Francisco, California. The company was founded by engineer Bill Fair and mathematician Earl Isaac in 1956 with the goal of offering a way to measure risk for consumer lending.
 
Since then, the FICO score has been the benchmark for banks and lending institutions to gauge the creditworthiness of borrowers and whether to grant credit or not. This can impact your credit worthiness for everything from mortgage rates to credit cards to auto interest rates that you qualify for.
 
Having a high FICO will save you money by helping you qualify for lower interest loans and quality credit offers during the course of your life. On the other side of the equation, having a low FICO score will end up costing you far more money because lenders will charge you a higher rate for taking a greater risk on you versus someone who has a higher FICO score.
 
Today, the FICO’s use has expanded to potential employers to assess potential employees and for insurance companies to underwrite insurance policies. In the 21st century, your FICO score influences almost every financial transaction you will make, and this is why it’s critical that you understand its impact and how to improve it.
 

What is a good credit score?

FICO is a three-digit score ranging from 0 to 850. 0 is typically the score for consumers who have yet to establish any credit, with 850 being on the high-end of the quality score. Ideally, you want your FICO to be as high as possible, all the way up to 850, which is as close to perfect as you can get.
 
As a general rule of thumb, any score below 650 is considered less favorable in the eyes of a bank or lender but anything above it is considered more favorable. If you approach a bank for a loan and have a FICO score of 650 or less, then the bank will have to fall back on its history with you as a customer as well as your length of time on the job and how long you’ve been working in your industry. In other words, they will have to make a relationship-based decision versus just a credit-based decision.
 
Most of the larger national banks will not consider past relationships because of their size and scale. For them, it’s a matter of numbers and, unfortunately, if you don’t fit within their credit score requirements they will not consider you for a loan so keep that in mind.
 
Ideally, you want to have a good credit score of 720 or above. This puts you in the top 1/5th of all consumers and the ideal borrower for most lenders. And it also puts you in a position to get the best offers on rates and credit cards as well.
 
A good FICO credit score is based on several factors such as:

  • Length of accounts.
  • Types of credit.
  • Age of accounts.
  • How many accounts you have opened.
  • How many accounts have balances on them?
  • Payment history.
  • How high balances are relative to their limit.
  • How quickly you pay the balances down.
  • Whether you make the minimum monthly payment or pay more than the minimum.
  • The total of your minimum monthly payments in regard to your total gross salary (do your monthly minimum payments exceed 50% or more of your gross monthly salary? That could indicate too much debt and therefore more risk).

Now, if you’ve had some trouble in the past that has negatively impacted your credit score, it can seem a little depressing. The good news is that it just takes a bit of knowledge and consistent effort to improve your FICO credit score.

How can I improve my credit score?

Too many consumers get intimidated by their credit problems due to lack of knowledge and give up before they ever begin.
 
To start rebuilding your credit score, do the following:

  • Keep balances low on credit cards.
  • Pay off debt rather than moving it around.
  • Don’t hold balances 90% or more of your limit.
  • Don’t close your oldest credit card accounts.
  • Pay off credit card debt ASAP
  • Don’t open a number of new credit cards that you don’t need or plan to use just for a short time.
  • Pay off any unpaid collections like medical bills or old debts.

If you’re trying to get established, talk to your bank about getting a secured credit card. Often, you will have to pledge a certain amount of money for your credit card that will be used as collateral.
 
Most banks will allow you to open a savings account and then extend you 95% of your deposited balance as your credit line. For example, a $ 500 deposit will gain you a $ 475 credit card line.
 
The savings account will be “frozen” by the bank as long as it’s being used as collateral so you won’t have access to the money. However, the money is still yours and is collecting interest in the meantime.
 
Your credit report will show a secured credit card on your file and, as long as you make your payments on time, you’ll have a positive payment history with them.
 
After a year of making consistent payments and working on cleaning up your credit issues you can apply for an unsecured credit card. After approval, you can close out your old secured credit card, unfreeze the funds in your savings account, and your credit report and FICO is improved by having an unsecured Visa or MasterCard credit card being reported on your credit report.
 
Another option is to get a cosigner, but there are pros and cons to that option.
 
The problem is that if you don’t make your loan payments, then the cosigner’s credit is negatively impacted and they are ultimately responsible so they might be reluctant to sign off on a loan with you.

Action Step

In closing, it’s smart to get a credit report from each of the major credit reporting agencies — Equifax, Experian, and TransUnion — every year. This way you can track your FICO score and address any negative or incorrect reports on your credit report.
 
The good news is that under federal law you are entitled to one free credit report each year. You just have to contact each of the credit bureaus and they will inform you how to get your report.
 
Go get your reports then get to work using the tips listed above.
 
Soon, you’ll begin to see the positive financial and career benefits of a high FICO and good credit history.

UnsecuredCredit – BingNews