A FICO score is a three-digit number used to rate a borrower’s creditworthiness and past money management. A high FICO score will result in lower interest rates, whereas a low credit score means high interest rates, or may even make it difficult to get a loan at all.
What Is A FICO Score?
Your credit score is basically a numerical representation of your past financial management. This number is the first thing most lenders will look at when they are considering your loan application because it reveals if you are likely to pay off any loan arrangement based on the agreed-upon timeline.
The FICO score is the most commonly used scale for credit scores. It was named after the Fair Isaac Corporation, which first developed this formula to represent all the information from someone’s financial history with a simple number. This has made it easier to compare candidates, rank them, and make decisions regarding whether someone’s loan will be approved or not.
A FICO score is used by the largest number of lenders, from banks to online lenders and credit unions. Although there are different scales and models for credit score calculations, the FICO score is frequently used as a synonym for credit score, because it is the most common scoring system.
Your score can affect many aspects of your loan. For instance, the lender can determine your interest rate based on your credit score. If it is good, you are more likely to get a lower interest rate. If it is poor, the lender might change the terms of the offer, but not in your favor, because they see you as a riskier investment, and they need to adjust their terms to account for that risk.
If you are, for example, applying for a credit card, your FICO score can have an impact on your credit card limit. If it is a personal loan you want to take out, your score can affect the maximum amount of money you can borrow as well.
Three major agencies are in charge of collecting information necessary for calculating one’s credit score: Equifax, Experian, and TransUnion. Your score can differ slightly in each one of the three reports, because the agencies may use different versions of the FICO scale.
Also, agencies receive data updates from time to time, and one may enter this new information into their system faster than the other two. These differences can result in variations among your FICO scores.
These versions exist because there have been changes in consumer behavior, and people today take out more loans than before. Your FICO score is necessary to keep up with these changes and adjust to the new standards. The most commonly used version is FICO score 8.
This score variation is, for instance, known for its forgiveness towards an isolated late payment. This means that a single late payment will not affect your overall score too much. On the other hand, keeping a high balance on your credit card and being too close to the limit will likely have a negative effect on your FICO score.
There have been new FICO versions, as this commonly used model was introduced more than ten years ago. In 2016, FICO introduced FICO Score 9, but most lenders still prefer the previous version.
What Makes Up Your FICO Score?
There are five categories that make up your overall FICO score, including
- Payment history (35%)
- Credit utilization (30%)
- Credit history length (15%)
- New credit applications (10%)
- Credit mix (10%).
Payment history makes up 35% of your overall score. This section will show if you have acted responsibly with your payments in the past. Any late or missed payments, accounts in collections, or bankruptcies will lower your credit score in this area.
Credit utilization refers to how much credit you have used compared to your available credit. If your overall debt on a particular account is close to your credit limits, that will affect this category. However, owing a lot of money does not need to have a negative impact on your credit score if your limits are also high. Lenders will look at your debt-to-credit ratio. If you use all the available credit and your balances are high, that is not good for your credit score.
Credit history length makes up 15% of your credit score. The information used in the formula is the average life of all accounts, as well as the oldest and the newest ones. In most cases, the longer you have had credit, the better your score will be, provided that you have been paying everything on time and kept your balances low. Candidates with no credit history have a harder time getting a loan, but if your other scores are good, you might not have to worry.
New credit applications can also affect your overall score. These are called hard inquiries and can have a negative impact on your credit score if you make too many requests for new credit too often. This is especially true if you have recently opened too many new accounts.
Credit mix refers to all the different types of credit you are using. People who have high credit scores typically have credit cards, signature loans, car loans, mortgages, etc.
Note that there needs to be minimum information to create a FICO score. For example, if you do not own at least one bank account older than six months, you cannot have your score calculated. Also, the Credit bureau needs to have information about at least one of your accounts in the previous six months.
What Is Considered a Good Score?
There is a scale according to which you can determine if your FICO score is “good.” These numbers vary a little, and they can be more or less important to different lenders. Many lenders will still approve your loan application even though your credit score is considered fair or even poor.
FICO scores can be anywhere between 300 and 850. In the United States, any score over 650 is usually considered good, and candidates with this score typically get loans at affordable terms.
Scores below 580 are considered “poor.” They are well below the national average, so loan candidates with this kind of score represent increased risk for the lender.
Scores from 580 to 669 are considered “fair.” These are still below the U.S. average, but more lenders will be willing to lend you money if your credit score is within this range.
Scores from 670 to 739 are considered “good.” These scores are within the average – they are either close or a bit above. The majority of lenders consider these candidates a low risk, and they offer affordable interest rates for their loans.
Scores from 740 to 799 are considered “very good.” These are above the national average, and prove a clean credit history for the candidate. Most lenders will create good offers for these individuals.
Scores above 800 are rare, but they are considered “exceptional.” Candidates with these scores are very dependable and have virtually no risk, so they might even be offered the Prime rate when they are taking out a loan.
Note that there are lenders who do not take your credit score into account when they are considering whether or not to authorize a loan. However, their terms may not be as favorable, as their interest rates can be higher than those who consider your score.
Also, a common cutoff line does not exist. Each lender has the right to decide for themselves what credit scores they will tolerate when approving a loan. There may be some other factors they will consider more important than your FICO score.
How Can I Check My Score?
Financial consultants recommend checking your FICO score at least once a year. This should not represent a problem as the process has been simplified as much as possible. Also, you do not need to order a copy from each of the three agencies, but you are allowed to do that if you want to compare the reports and make sure there are no errors.
Accessing your credit report and your credit score is done online, in a few easy steps. The first step is to visit the website annualcreditreport.com, where you can get your version for free at least once a year. In some exceptional situations, you are entitled to more than one. For instance, if you are unemployed and you want to seek a job within the next two months. Also, you can get a free report if you are on welfare, or you have recently been a victim of identity theft.
You can also order this report via mail or phone, but it means you will need to wait for at least two weeks until you actually get the report. The website allows you to access it immediately. Note that the above website is the only valid site for getting your credit report. Entering your personal information elsewhere may make you a victim of a scam. What you need to provide to get the report is:
- Name
- Date of birth
- Address
- Social Security number
Accessing your own report does not impact your current credit score.
It is common for people to find mistakes in their credit report. If this is the case, it is a good idea to dispute the error as soon as possible and not let it hurt your credit score, especially if you are planning to apply for a loan. You might want to compare reports from all three agencies, and if you still believe there has been a mistake, you can file a complaint to fix the error.
Can a FICO Score Be Changed?
Your score can change every time new data is reported to the three credit bureaus. Your financial activities can affect it in a positive way – if you are paying your loan installments and utility bills on time, if you are avoiding too many hard inquiries, etc. There are also actions that can affect it negatively, such as being late with payments or applying for too many new loans or credit cards.
Your score may not always be the crucial factor when lenders determine whether you are a trustworthy candidate for a loan, but it serves as a good indicator of how well a person is managing their finances.
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