What more important fico or credit score

The most important score you should know!

Believe it or not, your credit score is the most important score you should know. This score provides creditors and lenders with insight into your financial health and helps them determine whether they should do business with you. So, the health of your score is as significant as your physical health.

I know this Score is important, but what is a healthy Score?

The most widely used credit scoring model is the FICO 8, which is used by the three largest credit bureaus, Equifax, Experian, & TransUnion (The Big Three). Scores range from 300 (very poor) to 850 (exceptional). When your score is high you have better opportunity for lower lending rates.

Here are the most common factors that affect your credit score:

1. Payment History – this is the most important and accounts for 35% of your FICO 8 Score. One late payment can have a negative impact to your score.
2. Credit Usage – the amount of credit you are using accounts for 30% of your credit score. Using more than 30% of your available revolving credit (credit cards and lines of credit) not only lowers your score but is looked at negatively by creditors.
3. Length of Credit History – A long credit history accounts for 15% of your Score. So, don’t close those paid off revolving loan accounts.
4. Credit Mix – having a diverse portfolio of revolving and installment loans can improve your Score. Installment loans include automobile, mortgage, and student loans. Credit mix accounts for 10% of your Score.
5. New Credit – Opening too many new credit accounts along with the number of hard inquiries made on your credit is 10% of your Score. These indicate an increased risk to lenders.

The bottom line to a healthy credit score is to pay your bills on time, use less than 30% of your available revolving credit, have a healthy mix of installment and revolving credit, and don’t take out a lot of new credit.

1. Credit Intel
2. Credit Score
3. What Is a FICO Score? Do FICO Scores Really Matter?

Your FICO score is a three-digit number based on the info in your credit report. Learn what your FICO score is, why it matters, and how it’s calculated.

By Carla Fried | American Express Credit Intel Freelance Contributor

5 Min Read | June 14, 2021 in Credit Score

At-A-Glance

A FICO score can range between 300 and 850. A score above 800 is considered “exceptional.”

FICO scores are calculated based on information on file in your credit report.

Paying your bills on time and not using too much of your available credit are good ways to build an excellent FICO credit score.

Why Your FICO Credit Score Matters

To understand why FICO credit scores matter so much, put yourself in a credit card issuer’s or lender’s shoes. Every time you use a credit card, you’re essentially asking the card issuer to loan you money to make the purchase. Ideally, you pay it back when your credit card statement arrives to avoid interest charges. But you can also opt to pay only a portion of your credit card balance each month, which means the credit card issuer is trusting you to pay off the balance – and interest – over time.

 
A mortgage for a home purchase or a loan to buy a car is an even bigger ask. The lender is advancing a lot of money to help you get that car or home, while trusting your ability to handle repayment on a monthly schedule that can run as long as 30 years.

Enter the FICO credit score. It’s a key factor that businesses check to get a sense of your financial responsibility and credit habits. As such, it influences the terms of the debt they offer. For instance, when you apply for a new credit card, your FICO score plays a role in setting the annual percentage rate (APR) you will owe on unpaid balances. In general, the higher your FICO score, the lower your APR.

 
FICO credit scores range from 300 to 850. A FICO score of at least 740 is a signal to businesses that you’re likely to pay back loans on time. A score of 800 or higher, which FICO calls “exceptional,” suggests you’re a very low risk.

How FICO Calculates Credit Scores

There are three major credit reporting bureaus: Experian, Equifax, and TransUnion. Each credit bureau tracks your credit card and loan repayment history, how much debt you have, and other financial identifiers, such as any accounts sent to a collection agency or any bankruptcy filings in the past seven to 10 years.

 
The data in your credit report is fed into FICO’s algorithm, which calculates your three-digit score. You actually have three basic FICO credit scores: one based on each agency’s credit report for you. If you’re applying for a credit card, the issuer might collect one FICO credit score. For a mortgage, it’s typical for a lender to collect all three FICO credit scores.

Anyone can access their three general credit scores through www.annualcreditreport.com.1 FICO also computes specialized scores for credit card issuers, car lenders, and mortgage lenders. For more on specialized scores, read “Different Types of Credit Scores.”

 
In theory your FICO credit scores should all be very similar, but it’s important to check your credit reports periodically to make sure each one is up-to-date and doesn’t include any mistakes. Checking your credit report or subscribing to a credit monitoring service can also help you keep an eye out for identity theft. Read “How Often Should You Check Your Credit Report & Score?” and “How to Dispute Your Credit Report at All 3 Bureaus.”

Did you know? As an added security measure to help protect against fraud, American Express reports a reference number to credit bureaus – instead of your actual account number.

What Matters in FICO’s Algorithm 

Your FICO score is based on five main elements of varying weight:2

• 35%: Payment habits – your track record in making timely payments.
• 30%: Credit utilization – how much of your total available credit you’re using right now.
• 15%: Credit history – how long you’ve had credit accounts.
• 10%: Debt mix – the different types of credit you have, including credit cards, auto loans, personal loans, and mortgages.
• 10%: Credit inquiries – recent applications for new loans or credit cards that trigger a “hard inquiry.”

Because of their high weighting, your payment habits and credit utilization are what move the scoring needle most. A good way to make sure your bills are paid on time is to sign up for automatic bill pay. Regarding credit utilization, it’s a good idea to keep your outstanding balances to no more than 30% of your total available credit – and the lower the percentage, the better. To learn more, read “What Affects Your Credit Score?”

The Takeaway

A reality of financial life is that your FICO credit score matters plenty. Businesses use it to decide how likely you are to repay money you owe. A solid FICO credit score will likely help you get the green light for a new loan or credit card and play a role in the terms of the deal. Paying bills on time and not using too much of your available credit are key steps to building an excellent FICO credit score. 

Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.

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