If you’re ready to start budgeting and getting your finances in order for the new year, you probably know how much that number can impact your money. But exactly what is a credit score? Let’s break down what makes up your FICO score and why it’s important.

What is a credit score?

The three major credit bureaus are Equifax, Experian, and TransUnion. These companies keep track of your credit history and give you a number ranging from 300 to 850. That number shows the lender how shows how likely you are to repay debt. Lenders will deem you more financially trustworthy the higher your score is and you’ll get better interest rates on any loans.

Why should you care what your score is?

If you dream of becoming a first-time homebuyer or paying for investments like a new car, you’ll need a decent score in order to take out those loans. Having a good credit score can also save you money in the long run.

You’ll have a harder time getting approved for credit in the first place if you have a lower score. But once you do, you will pay higher interest rates, which means you’ll be paying more over the life of a loan.

What is considered a good FICO score?

FICO credit scores are determined in the following ranges:

• Poor: 350-579
• Fair: 580-669
• Good: 670-739
• Very good: 740-799
• Exceptional: 800-850

What goes into a credit score?

According to Experian, there are five main factors in determining your credit score, each with its own weight. So while you might have an excellent length of credit history it only makes up 15 percent of your score, and will only affect it a bit.

• Payment history (35 percent): Making payments on time is the single greatest factor in increasing your score. If you’ve ever had to file for bankruptcy or have late or missed payments, your score will go down.
• Credit usage (30 percent): This is how much of your available credit you are using. You should be using 30 percent or less of the credit available to you. So if you max out your credit cards, that will weigh your credit down.
• Credit history (15 percent): Your history takes into account how long you’ve had various credit accounts. If you’re newer to having credit accounts, this part of your score will be lower.
• Credit mix (10 percent): The kinds of accounts you have make up this portion of your score. Ideally, you should have different types of credit, like student loans, mortgages, and car loans.
• New credit (10 percent): Opening a lot of new accounts in a short period of time will negatively impact your score. But opening and maintaining one new account will likely boost your score.

How can I fix a bad FICO score?              

It’s not impossible to buy a house with bad credit, but it can be more difficult. Don’t lose hope if your credit score isn’t where you’d like it to be. With a bit of intentionality and planning, you can raise your score and get closer to fulfilling your financial dreams.