So, a couple of things. This is not a financial literacy or a repair-your-credit website. Unfortunately, you’d have to seek that information elsewhere. This website will assume you have fairly good to excellent credit (720+, ideally in the 770-800+ range) in order to take advantage of what’s out there. This website will also assume you have the means to pay whatever balances you generate in full every month — it makes no sense to chase points and miles when you’re paying for them in interest. That being said, knowing your FICO Score and what it means can really improve it over time. Like Morpheus said to Neo: “After this, there’s no turning back. You take the blue pill — the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill — you stay in Wonderland and I show you how deep the rabbit-hole goes.”
The FICO Score is a measure of consumer credit risk. The basic algorithm was created by the Fair, Isaac and Company (renamed FICO) and is constantly being updated. Credit bureaus like Experian, Equifax and TransUnion take this algorithm and plug in the public and lender-provided information they’ve collected to generate a FICO Score. Financial institutions and credit grantors then utilize one or more of these FICO Scores to make lending decisions. The basic scale is a three-digit number ranging from 300 to 850 (although industry-specific versions can range from 250 to 900). And while each bureau calculates their scores differently, and there are at least 28 FICO versions (and other consumer-facing versions nicknamed FAKO Scores) out there, the most commonly used version is called FICO Score 8.
There are five basic components to your FICO Score:
- Payment History (35%) – payment records, bankruptcies and any collections, liens or judgments, specific details on late or missed payments
- Amount of Debt (30%) – total amount owed across all accounts and specific types of accounts, the number of accounts with a balance, credit utilization ratio on revolving accounts, remaining amounts on installment loans
- Length of Credit History (15%) – age of oldest account, average account age, age of specific types of accounts
- New Credit (10%) – number of new accounts, length of time since opening a new account, recent requests for credit (e.g. hard pulls)
- Credit Mix (10%) – the diversity of credit account types
For those interested in points and miles, note the following:
- “Hard pulls” on your credit report occur when directly applying for new credit. This does affect your credit score, typically by a few points and only temporarily). Creditors may also “soft pull” your account from time to time (either to check up on you or for marketing purposes) but this will not affect your FICO Scores.
- The majority of your FICO Score is measured by Payment History and the Amount of Debt you have. The slight dip in score for New Credit may not only be temporary but could be totally outweighed by Amount of Debt because of improved overall credit utilization ratios.
- Adding one or multiple credit accounts will negatively affect your New Credit and Length of Credit History, but as long as you keep paying your accounts to zero, your Payment History, Amount of Debt (and to a lesser extent, Credit Mix) will all be positively affected.
- If you are considering a major financial purchase that will require a loan, like a house or car, consider being less aggressive with new credit applications. A FICO Score above 740 or so will generally qualify for the best rates available.
- There is little appreciable difference between a score of 740 and 850. If you have an 800+ score, you can afford to “spend” a few points to take advantage of points and miles.
Real World example: Ryan started this experiment about 3 years ago with 2-3 credit cards and 1 store charge card and a FICO Score around 826. He now has 19 open (consumer and business) credit cards and 1 store charge card and a FICO Score (Experian Score 8) of 820. During that 3 year period, he’s also opened and closed other credit cards, refinanced a mortgage, and taken out a car loan.
There are a number of ways to access and monitor the information and FICO/FAKO Scores the credit bureaus have on you. This will be covered in a separate post.
Other posts in the series, The Basics:
- The Basics: This Website is Dedicated to You…
- The Basics: Tracking Your Credit Scores and Points and Miles
- The Basics: Points and Miles Beyond Hawaii
- The Basics: an Introduction to the Major Credit Card Players
- The Basics: Requesting Your (For Real!) Free Credit Reports
- The Basics: Earning Points and Miles in the Margins