For many novices to the world of credit, the first time you learn your FICO score is when you apply for a credit card and are denied. You’ll lament: Why do credit cards only go to people with good credit — and what does this FICO score mean anyway?
The three-digit score is basically your credit batting average — and like in baseball, the higher the number, the better. Scores are generally from 300 to 850, and if you score a 720 or above, congratulations! You are in the credit big leagues with an excellent credit score. You won’t have any trouble getting a variety of credit cards with excellent perks and low interest rates.
With a score in the 690 to 720 range, you’re considered a good credit risk — and the availability of credit card deals will reflect that. But if your credit score is 630 or below, you are in the bush leagues of bad credit.
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FICO stands for Fair Isaac Corporation, which developed the scoring system used by the three major credit reporting bureaus: TransUnion, Equifax and Experian.
When you are denied a credit card, credit card companies must reveal your score and the credit-reporting bureau they used. You have the right to a free copy of your credit score from the issuing company within 60 days of being denied.
You also are eligible for a free credit report from each of the three reporting bureaus every year — this is a deal you should take advantage of, since even though each uses the FICO algorithm, there will be variations between companies. You can also monitor your credit file with a free credit report summary, updated weekly, from NerdWallet.
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There are five elements that determine your credit score:
- On-time payment history (35% of your FICO score): Always pay all of your bills — credit cards, phone, speeding ticket, everything — on time. Nothing will bolster your credit score more than timely payments.
- Amount of credit used (30% of FICO score): The lower the amount of available credit you use, the better. Keep your credit balance below 30% of your total credit line. Here, less is more, and it’s even better if you can keep your balance below 10% of your credit.
- Length of credit history (15% of FICO score): Time is on your side here — the more that credit card companies see you handling credit, the better. Keep older credit card accounts open with minimum use. Even if the old card has high interest rates and annual fees, an older account will show a longer credit history.
- New credit applications (10% of FICO score): Too many credit applications in a short period of time will drag down your score. There’s no hard rule here, but try to start a new credit line only once every six months.
- Kind of credit used (10% of FICO score): Credit companies prefer to see a mix of credit, such as car and student loans, in addition to credit card use. A credit variety suggests that you know how to use credit responsibly.
Getting a good credit score for the best credit card deals is a long game. But get a couple of years of good credit habits under your belt, and you’ll be getting big-league scores before you know it.
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