What is a FICO score?

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Definition:

A FICO score is a rating of a person’s creditworthiness that lenders use to assess how well someone handles debt and whether it’s a good idea to loan them money.

🤔 Understanding FICO scores

A FICO score is a rating of your creditworthiness based on your debt payment history, the amount of debt you’re carrying, and other factors. Lenders and businesses use it to help them decide whether to loan you money, issue you a credit card, or allow you to buy goods and services on credit. It’s a numerical score between 300 and 850, devised by the Fair Isaac Corporation. A high score means you’re considered a safe borrower likely to repay debt on time, and it’s easier to borrow money at the best interest rates available. A low score means you’re considered to be risky, someone who might not repay their debt, and you may have to pay higher rates or could be denied credit altogether.

Example

Suppose you apply for a loan from XYZ Bank, hoping to borrow money to buy a new car. The bank will likely ask a credit bureau for a copy of your credit report so it can use that information to make its lending decision.

Using the information on your credit report and Fair Isaac’s credit-score formula, the bank can find out your FICO score, which gives it a quick measure of whether lending money to you is a good idea, based on factors like how much you owe and what your track record in repaying your debt is like. If your score is good - at least 670 or so, in a range of 300 to 850 - you will likely be able to get a loan at good rates. If your score is poor - below about 580 - the lender may reject your application, or you may have to pay higher rates.

Takeaway

A FICO score is like a grade on your report card…

In school, when you get your report card, the grades are sometimes expressed by numbers, out of a maximum of 100. Your FICO score is like your report card for how you’ve handled debt in the past, based on things like your payment history, current debt balance, and the number of loans you have. Your maximum grade is 850 — The closer to that, the better.

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What is a FICO score?

A FICO score is a numerical score that lenders can use to get an idea for whether lending to you is safe or not. The name “FICO” refers to Fair Isaac Corporation, the analytics company that created the formula used to compute the score, using factors like how much debt you owe and whether you’ve consistently repaid your debt on time in the past.

FICO scores range from 300 to 850. The higher your FICO score, the better. Having a high FICO score means you’re generally seen as more trustworthy as a borrower. Having a lower score means lenders will see you as a riskier borrower.

Credit bureaus like Experian, Equifax, and TransUnion keep track of your credit history. This includes things like your payment history, total debt, and the number of accounts you have open. Most lenders request a copy of your credit report whenever you apply for a loan, and use the information on that report to calculate your FICO score. It’s one of the first things they look at when making a lending decision.

What do FICO scores mean?

Your FICO score is a rough indicator of how well you handle debt. A high score means you typically handle debt well and pay your bills by their due dates. A low score means you may have had trouble with debt in the past, such as missing payments or maxing out your credit cards.

Lenders view FICO scores in these general ranges:

  • Less than 580: Poor
  • 580 - 669: Fair
  • 670 - 739: Good
  • 740 - 799: Very Good
  • 800 or more: Exceptional

If you have an exceptional FICO score, it means you have a history of making timely payments and keeping your debt to a reasonable level compared to your credit limits. A poor FICO score may mean the opposite, that you’ve had trouble paying bills on time and are carrying too much debt.

What affects your FICO score?

Five primary factors affect your FICO score.

  • Payment history
  • Amount owed
  • Length of credit history
  • Credit mix
  • New credit

Payment history

Your payment history is the most significant factor in computing your FICO score. This tracks your history of paying your bills on schedule. Every time you pay a bill on time, it helps your score. If you miss a payment or are late in making a payment, it can hurt your score.

Usually, missed or late payments can cause much more damage to your credit score than on-time payments can help it. It can take months or years to eliminate the impact of a missed payment, so it’s essential that you make all bill payments by their due date.

Amount owed

The amount of money you owe is the second-biggest contributor to your credit score. You can divide this portion of your FICO score into two pieces: how much debt you owe and how much of your credit limits you’ve used.

If you already have a lot of debt, lenders see it as riskier to lend more money to you. That means that high levels of debt lead to lower credit scores. The ratio of your credit card debt to your credit card limits is important too. If you max out your credit cards, it can hurt your FICO score. Using a smaller portion of your limit can help your score stay high.

Length of credit history

Generally, the longer you’ve had access to credit, the more experience you have with handling debt. That typically translates into a better credit score.

This factor also includes the average age of your credit accounts. If you open new accounts regularly, it can lower the average age of your accounts, and thus it can lower your credit score. This also means that keeping older cards open instead of canceling them can boost your FICO score, even if you don’t use them.

Credit mix

Part of handling credit is gaining experience with different types of debt. Your credit mix looks at the different kinds of credit accounts you may have had, like mortgages, auto loans, student loans, and credit cards. Typically, the more different types of debt you’ve had, the better it is for your score.

New credit

When you apply for a loan, lenders usually ask one of the credit bureaus for a copy of your credit report. The bureaus note these requests for new credit accounts and add a note to your credit report. Each request can often drop your score by a few points for a period of time.

Why is a FICO score important?

Your FICO score has a direct effect on your ability to qualify for loans. Many lenders won’t offer loans to people who have poor credit, based on their FICO score. If your FICO score is high, it will be much easier to find a lender willing to offer a loan.

This also comes into play when applying for credit cards. Often, you can only get credit cards with premium rewards if you have good credit. Having a fair or poor FICO score can lock you out from getting the credit cards you want.

Your FICO score also helps determine how much you’ll pay to borrow money. Lenders look at your FICO score as a measure of how risky it is to lend money to you. The higher your credit score, the less risky you are. If you have a high score and handle your debt well, you may get loans at lower interest rates. Typically, people with lower FICO scores have to pay higher interest rates and fees when they borrow money.

Is a FICO score the same as a credit score?

Your FICO score is a credit score, but not all credit scores are FICO scores.

FICO scores use the information on your credit report to calculate a score that rates your trustworthiness as a borrower. The FICO score is the most widely used credit score, but other companies have devised other credit scores, based on their own formulas. Two examples are the Equifax Credit Score and VantageScore.

Because each formula is different, your FICO score might differ from your VantageScore or Equifax Credit Score, even if all three are credit scores.

What is a good FICO score?

FICO states that scores between 670 and 739 are considered good. It considers scores of 740-799 to be very good and scores of 800 or more to be exceptional.

Scores in the good range are near or above the average for U.S. consumers, putting you in an excellent position to qualify for loans from most lenders. Once you reach the very good or exceptional levels, loan terms get more attractive.

How can I get my FICO score?

Many companies offer free credit monitoring and scoring services, letting you keep track of your credit and the factors that affect it. Most of these services give you a credit score but use their own proprietary formulas or rely on methods provided by other companies, such as VantageScore.Your credit report has the information used to calculate your FICO score, and federal law allows you to get a free copy of your report from each of the three major credit bureaus once per year. You can request copies at AnnualCreditReport.com.

Some credit card companies, like Discover and American Express, offer free FICO scores to their customers as a benefit.

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