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If you’ve paid attention to your credit score and finances, you’ve probably heard of the FICO score.
But what is a FICO score? And what should you know about it? Keep reading for all the answers.
What is a FICO score?
The FICO score is a three-digit credit score created by the Fair Isaac Corporation. Credit scores are a way for lenders and other companies with whom you have a financial relationship to see your past debt repayment history, as well as other indicators of financial health, such as how much you owe versus your available credit.
Think of it like looking back at the crowd. Instead of consumers reporting their experience with companies, credit reports and credit scores tell companies what they can expect when they do business with you.
FICO ratings are popular. According to FICO, more than 90% of top lenders use them when deciding who they lend money to and on what terms they will offer it.
Why is the FICO score important?
Knowing your FICO score is important because, among other factors, it can determine whether you qualify for a loan or credit card, or the interest rate you are offered. The higher your credit score, the more likely you are to be offered a loan and the better terms you are likely to be offered.
Your FICO score may still affect you even if you are not applying for a loan. Your insurance rates may be raised if your credit score deteriorates. You can also check your credit score when you apply for a job, apartment, or even nursing home. It’s best to pay attention to your FICO score throughout your life, even if you don’t think you’ll need it.
What are the FICO score factors?
Your FICO score is determined by five main factors, and each has a different percentage when weighting your score.
- Payment history (35%)A: The most important factor in your score is how well you paid off your debts in the past. Your payment history includes your records of payments made, any missed or late payments, and bankruptcies. One missed payment can significantly lower your score, so it’s important to pay on time, every time.
- Credit use (30%)A: Potential lenders want to know how much you currently owe and how that compares to your available credit. If you have used up every dollar of available credit, such as a credit card limit, this is a sign that you may be in financial trouble. Maintaining low credit usage – ideally in the single digit range – is key to maintaining a strong credit profile.
- Length of credit history (15%)A: Loan accounts you have used for a long time carry more weight than accounts you recently opened or accounts you no longer use.
- Credit mix (10%)A: Lenders and other companies prefer, for example, to use various types of credit, and not just credit cards. You can get a good score without having different types of credit, but to get a perfect score, you can have a combination of credit card accounts, retail or auto loans, and a mortgage.
- New credit (10%)A: Newly opened accounts or credit requests when applying for new accounts may lower your score. When you apply for a credit card, your FICO score can drop by 5-10 points. Fortunately, this is a small drop, and it is temporary. However, this is good to know because a new loan request could make a difference if it lowers your score right before you applied for a mortgage.
How is a FICO score different from a non-FICO credit score?
Fair Isaac only creates FICO scores. According to myFICO, non-FICO credit scores can vary by as much as 100 points. Because the lenders you choose are likely to use FICO scores, you’ll want to know your FICO score before shopping for a loan.
What is a good FICO score?
FICO scores typically range from 300 to 850 points.
To get the best interest rates and make sure you qualify for the loans you want, you should try to get a FICO score of 740 or higher. There is not much advantage in raising your score when it is over 800.
If your score is in a good range, between 670 and 739, you have an average or above average score. You must qualify for a loan, although you may pay higher interest rates than if you were rated “very good” or “exceptional”.
If your assessment is fair, you may not have access to credit from the lenders you choose, or you may be charged exorbitant interest rates.
If you have a bad score, lenders see you as a risky borrower. You may have problems getting a new loan.
FICO score ranges
How to improve your FICO score
The first step to improving your FICO score is to always make sure you pay your bills on time or early. Even one invoice that you pay more than 30 days late can lower your FICO score and it takes time to recover. Set up alerts and automatic minimum payments whenever possible, and use other methods to make sure your bills are paid.
For many people, the next most important step is to work on your credit utilization ratio. This means paying off debt and possibly increasing credit limits to improve the ratio of total debt to available credit. An oft-cited rule of thumb is that 30% usage is the threshold for a good credit score. However, it is best to keep your balances as low as possible and pay them off in full every month if possible.
You can improve your credit balance if you currently only have one type of loan. You don’t have to buy anything that you wouldn’t buy otherwise, or have to pay interest. For example, if you only have a mortgage, you can open one credit card account and pay it off each month to improve your credit balance.
Finally, you should avoid closing your old accounts or adding too many new ones in order to maintain a long credit history. And don’t apply for a new loan right before you want your FICO score to be at its best.
If your FICO score is lower than you’d like, don’t take it personally. If you’re young or haven’t had a credit account in a while, a low score isn’t your fault. Even if your credit score is low due to financial mistakes, you can always start improving it today.
The FICO score is based on data and formulas. Knowing what it is and how it is calculated, you can take steps to improve your own FICO score in order to get the credit you deserve.