Do you know what your FICO score is? Your FICO score is a three-digit credit score that provides valuable insights into your credit behavior and the likelihood of you repaying borrowed money. Created by the Fair Isaac Corporation, this score ranges from 300 to 850 and is used by lenders to determine your creditworthiness. Let’s dive deeper into what a FICO score is and how it affects your financial life.
How FICO Scores Work
FICO credit scores are calculated based on data taken from credit reports provided by the three major credit bureaus: Experian, Equifax, and TransUnion. These credit reports contain information about your payment history, length of credit history, and any negative records such as bankruptcy or accounts in collections. FICO uses this data and its proprietary formula to generate your credit score.
Lenders rely on FICO scores to assess eligibility for their lending products. However, it’s important to note that your credit score is just one of several factors lenders consider, along with your income and job history.
FICO Score Ranges
FICO scores fall within a range of 300 to 850, with higher scores indicating more responsible borrowing behavior. Here are the typical ranges for FICO scores:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Exceptional: 800 to 850
Generally, a FICO score of 760 or above is considered good. However, credit card issuers and lenders may have their own criteria for what they consider a good credit score.
How Is a FICO Score Calculated?
While the exact formula used by FICO to calculate your credit score is proprietary, they do disclose the key factors they consider:
Payment History
Your payment history has the most significant impact on your FICO score, accounting for approximately 35% of it. FICO looks at whether you make your loan payments on time, any late or missed payments, accounts in collections, and bankruptcy records.
Credit Mix
The diversity of your credit accounts, such as credit cards, auto loans, and mortgages, accounts for about 10% of your FICO score. Having a variety of credit types can positively impact your credit score as it shows your ability to handle different loans.
Length of Credit History
The length of your credit history contributes 15% to your FICO score. Lenders prefer borrowers with a longer credit history as it provides more insight into their credit behavior.
Amounts Owed
The amounts you owe, including your credit utilization (the percentage of available credit you’re using), affects about 30% of your FICO score. Keeping your credit utilization low can positively impact your score.
New Credit Inquiries
When you apply for new credit, such as loans or credit cards, it can have a temporary negative impact on your FICO score. This factor accounts for 10% of your score and looks at the number of new accounts you’ve opened and recent hard credit inquiries.
What Is a FICO Score Used For?
Lenders use FICO scores to determine your eligibility for loans and credit cards. Your FICO score reflects how you’ve managed your previous and current loans, giving lenders an indication of your likelihood to repay them. Generally, higher credit scores increase your chances of being offered loans with favorable rates and terms.
FICO vs. VantageScore
Apart from FICO scores, there is another credit-scoring model called VantageScore. Both FICO and VantageScore are used by lenders to assess credit behavior, but they may weigh factors differently and have distinct criteria. Your FICO score may differ from your VantageScore.
How to Improve Your FICO Score
Improving your FICO score takes time, but there are actions you can take to positively impact it:
- Pay your loans on time consistently, at least the minimum required amount.
- Keep your credit utilization as low as possible by monitoring your credit card and line-of-credit purchases.
- Limit your credit applications to when necessary.
- When applying for loans, submit multiple applications at once to prevent numerous hard inquiries.
- Regularly check your credit reports for errors and dispute them if necessary.
- Maintain your oldest credit card accounts, even if you don’t use them frequently.
FICO Versions
Since its inception in 1989, FICO has released updated versions of its credit score calculations. While lenders decide whether to adopt new versions, the most commonly used version is FICO 8. Other versions include FICO 9 (introduced in 2016) and FICO 10T (debuted in 2020).
Knowing your FICO score and understanding how to improve it is an essential step toward financial literacy. By comprehending the factors that influence your FICO score, you increase your chances of saving on interest and accessing better loan options.
TIME Stamp: Knowing your FICO score and how to improve it is the first step towards financial literacy.
Frequently Asked Questions (FAQs)
Is a FICO score the same as a credit score?
Yes, a FICO score is one type of credit score used by lenders.
What do FICO scores mean?
FICO scores were created to help lenders estimate a borrower’s likelihood of repaying a loan.
What is a good FICO score?
According to FICO’s definition, a good FICO score falls within the range of 670 to 739. Scores ranging from 740 to 799 are considered very good, while exceptional scores are from 800 to 850.
Remember, understanding your FICO score and how it impacts your financial life is crucial. Start taking control of your credit today!