Why is Your FICO Score Important?

Why is Your FICO Score Important

Why is Your FICO Score Important

If you want to finance anything, you need a good credit score. You could pay thousands of dollars in high interest with a poor credit score compared to someone with good or better credit.

What is Your FICO Score?

There are three main credit bureaus: Equifax, Experian, and TransUnion. The most common one used by lenders and other companies is Equifax. The Fair Isaac Corporation created the FICO score about thirty years ago as an industry-standard number of score creditworthiness.

When you take out a loan, your credit score is one of the most significant factors used to determine eligibility, how much you can finance, and your interest rate. Utility companies, cell phone providers, and landlords use your credit score to determine eligibility, if you owe a deposit, and how much you owe. In Maryland, insurance companies can also use your credit score as a factor when determining your auto insurance premium.

The higher your credit score, the less risky it is for a lender to finance your loan. This translates to a low-interest rate, fewer fees, and more available credit. People with a high credit score have more advantages, commanding lower payments and their choice of lenders. For rentals, utilities, and cell phone plans, those with high credit scores may be able to forgo a security deposit or secure a better apartment in a more desirable neighborhood than someone with a lower credit score.

What is a Good FICO Credit Score?

A FICO credit score is a three-digit number between 300 and 850. According to Experian data, The average U.S. credit score is 711 as of 2020. Credit scores fall into ranges and determine your creditworthiness.

  • Exceptional: 800 and over
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: <580

As you can see, the average credit score falls into the Good range. Anything better than average is your goal if you want the best choice in lender, interest rate, and loan terms.

How Can I Build Credit Without Taking on Debt?

You can’t build a credit score if you don’t use credit. You can use two strategies to build your credit and gain a good or better score.

The first is getting a secured credit card. You deposit in the bank, and they offer you a credit card with the deposit amount as your credit line. 

Another way is to get a credit-builder loan, which works the same way. You deposit money into a savings account or certificate of deposit (CD). After making on-time payments for a length of time, you get your money back. You can usually get a credit-builder loan from a credit union or community bank.

How to Build Good Credit Habits

Getting a high credit score is easy when you’re first starting. But it’s even easier to create bad habits that translate to poor credit scores. Here are a few tips for building great credit habits:

  • Always pay your bills on time or early.
  • Don’t carry balances by paying your bills in full.
  • Use your credit cards regularly, but try to stay under 30% of your credit limit.
  • Don’t close accounts because it can negatively impact your credit score. Just stop using them.

Building an excellent FICO score is an essential part of your financial strategy. If you are overwhelmed with credit obligations, and your FICO score is suffering, contact Mummert Law for a consultation to see if bankruptcy is a good option for you!