We are frequently asked "what are good credit scores?" Or "how can I increase my Fico scores?" You may be wondering the same thing yourself. If so, it might help to first understand how your scores are calculated and how they are used.
How are Your Scores Used?
Fair Isaac Corporation (or FICO) scores were developed for use by businesses and financial institutions to quickly and objectively make decisions regarding credit risks. However, more recently, scores are being used for decisions unrelated to granting credit.
For example, utility companies use credit scores to determine deposit amounts, insurance companies use insurance scores to determine premiums, and employers use scores as part of their employment screening process for hiring and promotion decisions.
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Also, some may use scores as a measure of your character or integrity. However, it may or may not be an accurate representation. It's true that some people have simply abused credit or scammed the system. But oftentimes bad credit happens to good people. I have seen many clients suffer from poor credit due to unemployment, divorce, medical expenses, identity theft, or simply a lack of understanding of the credit system.
Just know that your scores are increasingly being used for purposes that can have significant consequences. As a result, it is important that you know your rights, legally improve your credit, and be proactive in managing your personal credit information.
How are Scores Calculated?
Your scores are developed from information contained in your credit reports. They represent a history of how you manage your credit. The formula for FICO credit scoring is a closely held secret. But we do know that their mathematical formula uses the information from your credit report to calculate a 3 digit numerical credit score.
Fair Isaac and Company's FICO scoring is the scoring model used by most lenders. FICO scores can range from 300 to 850. However, there are other scoring models besides the FICO credit scoring model.
Vantage scoring was collaboratively developed by Transunion, Equifax, and Experian. Vantage scores range from 501 to 990. The higher your score, the lower your credit risk.
Don't Lose Focus
Although your scores are important, I caution my clients not to get so focused on their scores that they lose sight of the bigger financial picture. In other words, improving your overall financial health may be a better goal than an 800 FICO score. Why?
Well, I've seen several credit reports with scores over 700 but the clients were over their head in debt. One client with scores above 750 and income of $72,000 per year was over $350,000 in debt! Fortunately she realized it was just a matter of time before her credit would suffer. So she sought help before her credit scores dropped.
Focusing on your overall financial health can lead you to make financial choices that not only result in improved scores, but can also help to maintain your good credit.
What's a Good Credit Score?
Many mortgage lenders currently consider 760 to be a good FICO score. A few years ago it may have been 720. Next year it may change again. The point is, by only focusing on your scores, you're shooting at a moving target. Instead, focus on improving your overall financial health and your scores will follow.