One way for planners to help clients access credit at lower interest rates is to teach them how to manage their FICO scores. This score can range from 330 to 850. The higher the score, the better. To get the best interest rates, clients should try to keep their FICO scores at 760 or higher. The score value is based on information from credit reports. Understanding how this information affects the score can provide an opportunity for planners to help clients make the right decisions to increase their FICO scores.
Payment History, Amount Owed and Length of Credit History
Payment history is the largest factor in the score. Planners should make sure clients understand the importance of making payments on time. When students enter college, they will typically apply for their first credit card. Students should do so with the understanding that failing to make timely payments can impact their ability to qualify for other types of credit like auto and home loans. This impact can continue well into the future.
The second major factor affecting the FICO score is the amount that’s owed. It’s an assessment of whether or not a borrower might already be overextended on credit. Being overextended means the borrower may have borrowed so much that he or she is unable to make the payments required on this amount of debt. Utilization affects the score positively if credit cards are used periodically and paid on time, but there is no effect on the score if someone has a credit card available but never uses it.
The longer the credit history, the better the score. In the example of the college student getting his first credit card and making timely payments, he’s also increasing his credit score for buying a home in the future by having a longer credit history from the credit card account.
Types of Credit and New Credit
Ten percent of the FICO score comes from looking at the types of credit that are used. These types include credit cards, retail cards, installment loans, finance company accounts and mortgage loans. Having a credit card and using it responsibly provides a higher score than not having any credit cards at all.
The final category that affects the FICO score is new credit. Opening several accounts in a short period of time can indicate a higher credit risk and will lower the score.
Checking a Credit Score
When a consumer checks his or her own credit score, there is no impact on the score, and it is recommended that clients check credit reports on a regular basis to identify and correct any errors and to ensure that there has not been an identity theft situation. Every individual is entitled to one free copy of the credit report from each of the three credit bureaus each year. A good practice to monitor activity throughout the year by requesting a report from a different company every four months.