Why are FICO Credit Scores Important?

April 20, 2016

We’ve all heard how important our credit score is. But have you really thought about the lasting effects it could have on your future ability to borrow? Have you taken the time to monitor your credit reports and really understand what they mean? We’re here to help break it down for you!

What is a FICO credit score?

A FICO credit score, created by the Fair Isaac Corporation, is a number that represents how creditworthy a person is by boiling down positive and negative information from their credit history into one number. Lenders, like banks and credit card companies, use these scores to determine how likely you are to repay the amount you are borrowing.

This impacts whether or not you are approved for a loan, how much you are able to borrow and the interest rate you are charged.

The FICO credit score range is between 300 and 850. Higher scores indicate to lenders that you are a better credit risk. Average scores are typically between 600 and 800.

Why good FICO credit scores matter.

High FICO scores are certainly beneficial for personal finance reasons, but that’s not all! Potential employers, insurance companies and even landlords will often run a credit check to determine a person’s reliability.

Here are 3 ways to maintain a healthy FICO score:

  1. Monitor Your Credit Report – Stay on top of your credit with the 3 major credit bureaus: Experian, TransUnion and Equifax. By periodically checking your credit report, you will be informed of items, such as late payments, which could be impacting your credit score. This will also help identify any mistakes appearing on your report so you can take action to have them corrected, whether they are a simple reporting error or the result of fraud.
  2. Pay Your Bills on Time –This is one of the most important aspects of your FICO score because lenders want to be confident that you will pay them back regularly. Make it a habit to pay your bills by the due date, or before, every month.
  3. Resist New Credit – Constantly opening new credit accounts can be a red flag for lenders and will affect your credit score negatively, especially for people who don’t have a long credit history. So, don’t be tempted the next time you’re on a shopping trip and they ask you to open a credit card with them. Ask yourself if it’s really worth it in the long run.

You are entitled to receive a free credit report from each major credit bureau every 12 months. ENB recommends you keep track of all three. This will help you have a more complete view of your credit picture and understand any discrepancies from bureau to bureau. Free credit reports provided by the bureaus currently do not include free credit scores. However, your credit card company may provide a free score. Some companies even include credit scores on your monthly statements. Be wary of programs offering “free scores”. If you enroll, they are generally not really free.