Everything You Need to Know About Your FICO Score
5 minutes read
We’re sure you’ve probably heard of a FICO score. Maybe you keep a close eye on yours, but what else do you know about a FICO score? Do you know what to do to raise your score, what can lower it, or even how it is calculated?
A FICO score plays an important role in your credit and helps borrowers determine how much or even if they will let you borrow. Knowing more about your score can only help you as you apply for a home or auto loan, try to get a credit card, or even rent an apartment.
Continue reading this article for everything you need to know about your FICO score.
What Is A FICO Score?
Starting with the basics, a FICO Score is simply a three-digit number that helps lenders determine the likelihood that you will be able to repay a loan and, consequently, how much you will be able to borrow and sometimes at what interest rate. This is a quick and consistent way for lenders to decide if they will let you borrow from them.
The higher the score, the more likely you will be able to borrow and the higher the amount. Have a lower score? You might have less opportunity to borrow, or you might be offered a higher interest rate.
These are credit scores that the Fair Isaac Corporation has calculated since the company debuted them in 1989 and have since become the standard for credit scores. They are used by 90% of top lenders because they are seen as making accurate assessments of your creditworthiness, and besides being accurate, they are deemed to be a fair representation.
There are other types of credit scores, but FICO is by far the most common and the most widely used by lenders. There are several scoring models on the market. Besides FICO, you might also hear about VantageScore. Large lenders might also have their own models to formulate a score. These models will be built in-house by the company, or they could have a third party create a model for them.
How Is It Calculated?
Now that you understand what a FICO score is and what it means for your ability to borrow, you’re probably wondering how it is calculated.
FICO scores take data from several different areas of your credit report to make one score. There are five categories where the data is grouped. Your score is a composite of these groups and the percentage the company applies to each: payment history (35%), amounts owed (30%), credit history length (15%), new credit (10%), and credit mix (10%).
There are three major credit bureaus, Equifax, Experian, and Transunion, and they each will create a credit report for you. Because they do not share their information, three credit scores are created for you based on two main scoring models, which include FICO and VantageScore.
What Is A Good FICO Score?
Understanding what a good score is and what score will make borrowing difficult is important to know. In this section, we will break down score ranges so you can better understand what makes a good or poor score.
|Below 580||Poor||This credit score will show lenders that the borrower may be a risk. This is below the average score of U.S. consumers.|
|580 to 669||Fair||Many lenders will approve loans for borrowers with this score, though it is below the average.|
|670 to 739||Good||Most lenders will consider this a good score and approve loans for borrowers. Scores in this range are around or slightly above the average for U.S. consumers.|
|740 to 799||Very Good||Scores in this range are above average in the U.S. and show that borrowers are dependable in their repayment.|
|800 and up||Excellent||With a score in this range, borrowers are exceptionally low-risk to lenders.|
What Can I Do To Raise My FICO Score? And What Might Lower It?
Maybe your score is lower than what you would like it to be, and you are wondering how you can get into a higher score bracket. We have some great tips to help increase your score.
Paying your bills on time every month will reflect positively on your FICO score, and paying late even by a day will result in a ding on your score. This doesn’t just include paying your credit card bills on time. You can also see results from paying your utility bills, rent, phone bills, and more on time.
If you have debt on a credit card, paying that off will also help with your credit score. Remember, debt owed makes up 30% of your credit score. Keeping your balances low on revolving credit will also show lenders that you know how to manage credit.
We also recommend not just opening a new credit card because you got an offer in the mail. Only open new credit card accounts when you need them. Too many inquiries into your credit can hurt your score, and having these cards, for some, is only a temptation to act as if you have money to spend when maybe you really don’t.
You can and should get a copy of your credit report to dive into what is hurting or helping you. Sometimes you might even find that there are inaccuracies on your report, and disputing those can raise your score.
Raising your score can take time, but don’t get discouraged. Building good habits will help you in the long run.
The Bottom Line
A FICO Score is an important part of everyday life that can help you when you need or want to borrow money for a home, car, medical expenses, and so much more. This score offers borrowers an unbiased and quick way to see if you will be someone they should let borrow from them. Now that you have read this article, we hope you will better understand your FICO Score and not be intimidated when you look at your own score.