Your FICO Credit Score: How to check it, understand it, and improve it

As you get older and start “adulting” you will begin to hear a lot about your “credit score.” Here’s a crash course of answers to common questions so that you can learn some of the basics.

Question 1: What is a FICO credit score?

Your credit score is a 3 digit number that determines your reliability as a borrower. Although there are several different types of credit scores, the FICO credit score is the most well known and used type of credit score. FICO stands for Fair Isaac Corporation (that’s the company who invented the formula).

Question 2: Why should I care about my credit score?

You should care about your credit score because it plays a huge role in your ability to live as an independent adult. Before you rent an apartment the company will check your FICO credit score. If the score is too low they may not let you rent the apartment. If it is just “okay,” they may still let you rent the apartment but may instead charge you a larger deposit to do so or require you to have a cosigner.

Apartment buildings are not the only people who check your credit score. Car companies, phone companies, and banks do the same thing before they loan you money to buy a car, allow you to purchase a home, or provide you with a contract for your own cell phone plan. Once again, if the score is below average companies will charge you a higher interest rate to borrow money, if the score is really low, they may not loan you the money at all.

Question 3: How can I figure out my credit score?

There are estimates and “official” scores. Getting the official score may cost you money, although there are a few companies who can give you a free reporting a couple times a year. Nevertheless, you can get your credit report from annualcreditreport.com and get your official FICO score from myFICO.com. Unless you are about to purchase a new car or buy a home, getting a ballpark estimate of your credit score should suffice. You can usually get a free estimate of your FICO score from your bank. In fact, this feature can usually be added to the credit card statement you get from your bank each month.

Question 4: What is a “good” credit score?

As a rule of thumb, anything under 500 is dismal. It will be tough for you to borrow anything from anyone, let alone rent an apartment, buy a car, or secure any type of loan or credit card.

Anything above 760 is great. With a credit score above 760 you should be able to rent an apartment with ease and secure a loan for a car or home with no problem. Banks will probably reach out to you and ask if you’d like credit cards and you’ll start receiving notices of different low rate loans you qualify for. Simply put, banks will want to work with you because they know they can count on you to repay the loan.

Credit scores between 500 and 760 are on a sliding scale. The higher it is the easier time you’ll have securing loans for whatever you need them for (ie. small business ventures, a car, a new home, etc). The lower the credit score, the harder it may be for you to secure loans. In this case, you may have to pay a larger interest rate to borrow money and you may even need to have someone cosign your [car, home, or small business] loans.

Question 5: How is my FICO credit score computed?

Your FICO credit score is based on a combination of factors but there are 4 main components:

1. Your credit history. This is the length of time you’ve had access to credit (like credit cards, bank loans, etc). The longer your credit history, the better. In other words, someone who has had their credit card for 10+ years is going to score higher in this area then an 18 year old college student who just opened her account. Your credit history accounts for 15% of your credit score.

2. Your debt compared to your total credit limit. This is the amount of credit you’ve used compared to the amount of credit you have access to. The lower the percentage the better. For example, if you have a $16,000 limit on your credit card and your credit card balance is $8,000 then you’ve used half of the credit available to you so your percentage is 50%. However, if your limit is $16,000 and you’ve only charged $4,000, then your percentage is 25% which is much better. You get more “points” for having access to credit and showing the self-discipline of not using much of it. Why does this matter? Well because the mere fact that you have a high credit limit shows that banks don’t mind lending you money. The fact that you haven’t used much of that money shows that you are more diligent in your use of credit. Thus, this factor plays a large role (30%) into computing your credit score.

3. Your credit mix.  This includes the types of credit you’ve had (which is 10% of the score) AND the timing of when you received this credit (another 10% of your score). Credit card companies like to see that you can repay a variety of loans. Even though showing that you can pay off your credit card balance is great, companies also like to see that you can be relied upon to make fixed payments toward something for a certain length of time. If you have only had credit cards then you will not score as high in this area as someone who has paid off a car loan and is actively paying a mortgage or student loans consistently. Moreover, if you’ve just received different types of loans you won’t score as high in this area as someone else who has had various types of credit for a longer length of time.

4. Your track record of paying your bills on time. By paying your bills on time, I mean paying them a few days before they are do. Credit card companies want to know that they can count on you to give them their money when they ask for it and not a moment later. The more consistent you are at paying your bills on time, the higher you will score in this area. In fact, your track record is so important that this area is weighted the most in calculating your credit score (35%).  

Question 6: How can I improve my credit score?

1. Pay off your debt. As you pay down the debt you owe you will decrease your ratio of credit used to credit available which will increase your credit score. Plus, you will improve your payment history. Both of these factors combined account for 65% of your FICO credit score.

2. Be on time with your payments. If you don’t have the income to pay back all of your debt right now, you are not alone. Many of us have credit card debt or student loans that we are still working to pay back as well. Even if you can’t pay off your full balance at once, focus on making on-time monthly payments a few days before your bill is due. Doing so will improve your “payment history” which will improve your overall credit score.

3. Increase your credit limit. If you are already making on-time monthly payments on your credit card then another way to increase your score is to increase your credit limit. For example, if you have $2,000 in credit card debt and a $6,000 limit, the ratio of your credit used to credit available is (2,000/6,000) 33%. However, you were to increase your credit limit from $6,000 to $8,000. Then all of a sudden your ratio of credit used to credit available is (2,000/8,000) 25% which is better. The easiest way to increase your credit limit is to simply call the bank and ask for an increase. Most credit card companies will re-evaluate your case every few months and automatically increase your limit if you are eligible, but calling the bank yourself might speed along this process.

To summarize, your FICO credit score is a 3 digit number that tells companies about your reliability as a borrower. It ranges from 300-850, the higher the better. If your credit score is too low you may have a hard time renting an apartment, buying a car, or even getting your own cell phone plan. You can get a free estimate of your credit score from your credit card company, but official scores may cost you money. Generally speaking, your FICO credit score is based on 4 main factors: your credit history, the total debt you have compared to your credit limit, your credit mix, and your track record of paying your bills on time. If you want to improve your score prioritize paying off your debt, increasing your credit limit, and making on-time payments when your bills are due.

Do you have any questions? Is there anything more you'd like to know about your FICO credit score?

Credit Card 101: The Basics

Despite your established career and long list of accomplishments, there is one area that may need a little fine tuning…personal finance. While you may be getting along okay right now, you can do better. Here is a reminder of some credit card basics:

Try to get the lowest interest rate you can. A credit card allows you to borrow money, usually up to a certain limit. It can be convenient during times when you don’t have access to cash or need to quickly get yourself out of a financial bind. However, whenever you use credit cards to purchase things, the bank charges you a fee. This fee is called “interest” and the amount of interest you pay is deemed your “interest-rate.” The lower the interest rate, the less of a fee you pay to borrow the money and use the credit card. Since most people end up needing a credit card every now and then, banks typically give you a small window (up to 1 month) with which to pay back the money you charged to the card. If you pay back the money within that amount of time, then you are not charged an interest fee on the money you borrowed. Your goal is to get a card with the lowest interest rate you can so that in the event that you do use the credit card and are unable to pay off the full balance by the end of the billing cycle, you aren’t charged a huge fee.

Be wary of 0% interest rates. Now this advice may seem counter to what I just said, but hear me out. Oftentimes, when you first sign up for a credit card, banks will offer you a 0% interest rate for the first 6-18 months. This means that you can borrow money “interest free” for that amount of time. While this is a good deal if you plan to pay off your balance quickly, more often than not, it’s a trap.  When college students, young professionals, and any adult in a financial bind realizes they can borrow money to purchase things now with no penalty for doing so, they tend to borrow more than they would have otherwise. Once the 6-18 month interest-free period ends, the interest rate often skyrockets to almost 20%, which can be a recipe for disaster for anyone seeking to get out of debt or build wealth in the near future. If you have one of these credit cards, you need to practice self-control to make sure you are not borrowing more than you can pay back.

Consider getting a credit card from a credit union instead of a commercial bank, if you can. Credit unions (like Navy Federal, USAA, etc) are nonprofit banking institutions. Because of that, they have several advantages over typical commercial banks (like Bank of America, Chase, Wells Fargo, etc). One advantage of credit unions is that they tend to charge lower interest rates on credit cards and bank loans. I can tell you from personal experience that the interest rate on the credit card I have from a credit union is DRASTICALLY lower than the interest rate on the credit card from a commercial bank. In fact, the interest rate is so much lower that I never even use the other credit card.

Another advantage of credit unions is that they usually have better customer service and are more forgiving when you make a mistake. When I first got a credit card in college I was terrible at keeping track of things. I would sometimes forget to pay off my credit card balance, not because I didn’t have the money, but simply because I forgot to do so. If I had made that mistake with a commercial bank they might have charged me a late fee for not paying my balance on time. However, since I was part of a credit union, I just called them and explained my oversight. They “forgave me” and removed the late fee EVERY. SINGLE. TIME.

You should know that you cannot just walk into a credit union and ask for a credit card. In order to receive services from a credit union and use them as one of your banks, you have to meet certain requirements in order to become a “member.” For example, some credit unions are only available for teachers and their families, another credit union may only serve members of the military and their families, and other credit unions may be strictly for hospital employees and their families. You just have to search for credit unions in your area, find one you are eligible for, and sign up.

Pay more than the minimum balance each month. When you charge money to a credit card, they usually don’t demand that you pay off the full balance right away. Oftentimes they only demand a small amount called a “minimum payment.” What they don’t tell you is that if you only pay the minimum payment each month, you will still be charged interest on the amount that’s left over. As a result, they will charge you even more money in interest and it will take you much longer to pay back the full amount. Moral of the story: pay more than the minimum payment and try to pay off the entire balance at the end of each billing cycle if you can.

Find out when your billing cycle ends each month. If you are going to be diligent about paying off your credit card balance each month or even just making sure you aren’t late on any payments, it is essential that you know when your billing cycle ends each month. Why is this important? Well because if you happen to use your credit card near the end of your billing cycle, then you must pay off the balance much sooner or else you will be charged interest on the amount you borrowed. For example, if your credit card interest rate is 14% and you purchase something for $100 on your credit card the day before your billing cycle ends, then you must pay back that $100 the same day or else the bank associated with your credit card will charge you an added fee of $14 and your bill will now be $114. I should note that most credit card companies will give you a grace period of about 25 days after you charge something, but not all credit card companies provide that benefit. Check to see if your credit card has a grace period and figure out when your billing cycle ends each month so you can coordinate your payments in a way that prevents you from paying interest.

Look at your statement each month. This may sound a little basic, but trust me it bodes reminding. If you have your credit card payment set up for automatic withdrawal from one of your checking accounts you may be tempted to occasionally forgo looking at your bank statements. Let me caution you against that. It is important to check your statement, even if you have very few charges, to make sure there are no errors. The people who process your statements are human and sometimes mistakes are made. You’ll never know they are there unless you check. Plus, sometimes you may be charged extra fees you are unaware of.

Check your FICO score periodically. Along with checking your statement, it is essential that you periodically check your credit score aka your FICO score. This score is a credit rating from 300-850 that determines how reliable you are as a borrower. The higher the score, the better. Your credit score is what is used to determine whether or not you qualify to rent an apartment on your own (without having your parents cosign for you). A higher score will also allow you to purchase a car or a home for a lower interest rate or fee. Check your FICO score periodically to get an idea of where you are at. Any score above 750 is pretty good, scores under that can use some work. Most credit card companies will give you a free estimate of your FICO score with each credit card statement.

Call the bank once a year to lower your interest rate. It is essential that you do what you can to lower the interest rate on your credit cards. Technically, your interest rate doesn’t matter as much if you pay off your credit card balance each month, but you want the interest rate to be low just in case. If there is one thing I’ve learned, it is that life can be unpredictable at times. We plan as best we can, but sometimes expenses can still catch us by surprise. Whether it’s a toothache that turns into an urgent dental procedure or an acute injury that turns into an expensive doctors appointment, you never know when you may need to use your credit card to cover an expense. Do your best to get the interest rate on your credit card as low as possible. While you may not be able to immediately alter the interest rate a credit card company starts you off with, you can however, ask for them to change the rate once you have had the card for awhile. In fact, I make a personal habit of calling my bank once a year to politely ask them to lower my credit card interest rate. Even with my status as a full-time medical student with no salaried income, they lower it EVERY. SINGLE. TIME.  Some times we have not because we ask not. Call your bank and ask them to lower yours as well.

Avoid Cash Advances. When you get a credit card, they may offer you something called a “cash” advance. This means that you can get a certain amount of money in “cash” for a particular fee. The problem with this convenience is that it ends up costing you a lot of money. Many credit card companies charge you a higher interest rate to do a cash advance than they do to purchase something directly with the card. Plus, they usually have rules that prevent you from paying back this cash advance (that is costing you lots of money) until after you have completely paid off your credit card balance. This means that you could easily fall into the trap of being stuck paying a super high fee for the cash advance for much longer than you would have liked. The bank profits a lot, which is why they offer it, but you end up paying a lot more than you may have anticipated which is why it’s best to avoid that option if you can.

Consider using credit cards for points and free perks. If you are at the point where you consistently pay off your credit card balance in full each month, then you may want to consider something else: using credit cards for points and perks. Many rewards credit cards from companies like American Express, Chase, Citi bank, Capitol One, and Bilt allow you accumulate credit card points from normal purchases that you can transfer to airline and hotel loyalty programs for tremendous value. For example, I was able to accumulate points and transfer them to the Virgin Atlantic airline (a Skymiles partner of Delta) and get a first class flight to South Africa on points. Many other people transfer points to hotel and resort chains to get free stays at international resorts and Caribbean vacations. Recognize that although using these travel rewards cards can result in huge perks, they can also be a huge risk and financial catastrophe for anyone who doesn’t pay their credit card balance in full each month.

To summarize, if you are like most people, you probably didn’t take a personal finance class in school. No worries. I’m here to help you learn the basics, especially when it comes to credits cards. When you first get a credit card, try to get one with the lowest interest rate you can (that way you won’t be charged as much money when you use it). However, be careful when you get 0% interest credit cards, because the interest rate tends to skyrocket to almost 20% after a certain time period which can get you into trouble if you aren’t careful. If you can, try to get a credit card from a credit union instead of a commercial bank. Chances are the interest rate will be lower and the customer service is usually better. When you use your credit card, try to pay more than minimum balance each month. Find out when your billing cycle ends each month so that you can pay off your balance before the added interest payment hits. Also, don’t forget to check your bank statement each month (to make sure there are no false charges or hidden fees) and look at your FICO credit score periodically since your FICO score is what apartment buildings will look at to see if you can get an apartment without needing someone to cosign or buy a home without paying a high interest rate. Be aware that you can call your bank once a year to get your credit card interest rate lowered. Lastly, try to avoid cash advances if you can and consider using credit cards for perks and rewards if you are someone who pays off your balance in full each month.