Even if you've never used credit or borrowed a dollar, you've got a FICO score. And that sad little score is 0 — for now! Through on-time payments, keeping accounts open and in good standing for a few years, and not using all of the money made available to you, you'll slowly build your FICO score up to a respectable number.
So, what is this "FICO" you speak of?
FICO stands for Fair, Isaac & Company. Fair Isaac aggregates data based on lender reports to generate a number for each consumer. Their scores are purchases by the billions by lenders who then make decisions about customer's creditworthiness based on the data. There are lots of ways that lenders can accumulate data and evaluate borrowers on a case-by-case basis, and they did until the 1950s when Fair, Isaac & Co. was started.
Age ain't nothin' but a number, but FICO is your whole future.
FICO is the fastest, easiest, and most widely available way for a lender to decide if they want to lend to you. Landlords, banks, health insurance companies, and even employers use FICO to evaluate their risk.
Don't get us wrong, you can get by with bad credit, but life is a lot easier and less expensive with good credit. You'll pay less in interest over time and have a lot more options afforded to you. So how do they calculate your FICO score?
- Payment history. Pay your balance in full each month. If you can't afford to pay your balance, cut your spending.
- Credit utilization. Just because you have a $50,000 limit on your card don't mean you can spend it all. Keep it under 1/3.
- Account history. A long history shows that you aren't going to skip town anytime soon.
- New credit. Don't go out and open 10 new store accounts the month before you apply for a mortgage. It makes you look like you reallllly need money.
- Credit mix. Care loans, traditional credit cards, mortgages, whatever - just mix it up. Have a few different types of accounts shows that you are well-established and well-rounded consumer.
Responsible credit use over a period of time makes the world go 'round. Get on board!