By: Joe Goldy, CFP®, CDFA®
Your FICO score is critical in determining your financial opportunities, from securing a mortgage to getting the best interest rates on loans. A high FICO score can save you thousands of dollars over your lifetime, while a low score can limit your options and cost you more in interest. In this guide, we'll explain a FICO score, why it matters, and how to maintain a strong credit profile. Whether you're just starting your financial journey or looking to improve your credit score, these tips will help you take control of your credit health.
Understanding the Importance of Your FICO Score
Hi, Joe Goldy, Certified Financial Planner with Highland Financial Advisors.
Welcome back to our YouTube channel!
Today, I want to talk to you about the importance of understanding what a FICO score is and how crucial it is to maintain a high FICO score if you can.
What Does FICO Stand For?
FICO stands for "Fair, Isaac, and Company."
It was created by two gentlemen back in the 1950s. Isaac and Fair were their last names, and they were trying to develop a metric to help lenders easily understand the risk they were taking when lending money. This applies to loans of all types—whether it's an auto loan, mortgage, or personal loan.
They wanted to create a standardized metric that made it easier for lenders to assess risk. That's how the FICO score was born.
How FICO Scores Are Reported
The FICO score is important, but you also need to understand that it's always reported to the three credit bureaus in the U.S. These bureaus are:
Equifax
Experian
TransUnion
These credit bureaus are responsible for maintaining your payment and credit history and your personal information. Regularly monitoring your credit reports is always a good idea to ensure accuracy.
Is Your Credit Report Individual or Joint?
It's also important to understand that your credit report is always in your name only—even if you're married. Your credit report and payment history are reported individually. Marital status isn't even mentioned on the credit report.
Why Your FICO Score Matters
Your FICO score ranges from 300 (low) to 850 (high). Small differences in your FICO score can result in significant differences in the interest rates you pay on loans.
Example: The Impact of Your FICO Score on Loans
Mortgage Example: If you have a $400,000 mortgage at a 6% interest rate, your monthly payment is approximately $2,400. However, if your FICO score is lower and you qualify for a 7% interest rate instead, your payment increases by $170 per month. Over a 30-year mortgage, that adds up to $95,000–$100,000 more in interest.
Auto Loan Example: If you borrow $25,000 for an auto loan at a 5% interest rate, your monthly payment is roughly $470. But with a 9% interest rate, you'll pay $50 more per month—adding up to $3,000–$3,100 more in interest over a five-year loan.
These examples show how even small differences in your FICO score can significantly impact the total cost of your loans.
Key Factors That Influence Your FICO Score
Several factors influence your FICO score:
1. Credit Age
The length of your credit history plays a significant role. For example, getting your first credit card at 18 or 19 and keeping that account open for years positively impacts your score.
2. Credit Utilization
This measures how much credit you're using compared to your credit limit.
For instance, if you have a $40,000 credit limit and only borrow $10,000, your utilization rate is low, which boosts your score.
However, if you're using $35,000 of that limit, it negatively affects your score.
3. Credit Mix
Having a variety of credit types—such as credit cards, personal loans, and mortgages—can improve your FICO score. Lenders view this diversity favorably.
4. On-Time Payments
Payment history is the most critical factor, making up 35% of your FICO score. Missing or late payments have the most significant negative impact on your score, so it's essential to always pay on time.
How to Maintain a High FICO Score
To maintain or improve your FICO score, follow these steps:
Monitor Your Credit Reports
Thanks to recent legislation, you can now access your credit report weekly for free at AnnualCreditReport.com. Reviewing your credit report helps ensure closed accounts are appropriately marked, your address is correct, and outdated information is removed.
Get Credit for Rent Payments
Rent payments aren't automatically included in your credit report. However, some free and paid rent-reporting services can report these payments to the credit bureaus, which can improve your FICO score.
Freeze Your Credit Report
Placing a freeze on your credit report can protect you from fraud. A freeze prevents anyone from opening an account in your name unless you unfreeze it.
Practice Good Security Habits
Regularly update your passwords and usernames. Close unused accounts and verify they're correctly marked as closed on your credit report.
Recap
Maintaining a high FICO score is vital. Small differences in your score can significantly impact the interest rates you pay and the total cost of loans over time.
Key Takeaways:
Focus on factors like credit age, utilization, credit mix, and, most importantly, on-time payments.
Missed or late payments have the most significant negative impact, so always prioritize making timely payments.
If you're a renter, consider using rent-reporting services to improve your score.
Monitor your credit report regularly at AnnualCreditReport.com.
Consider freezing your report for added security.
By taking these steps, you can maintain a high FICO score and save money in the long run.
I hope you found this helpful. See you next time!
Joseph Goldy, CFP®, CDFA ®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.