If you’ve ever taken out a loan, applied for a credit card, bought a house, or even simply requested your credit report, chances are, you’ve come across the term “FICO score”.
The terms “FICO score” and “credit score” are often used interchangeably, and both are used by lenders to determine whether or not you are likely to repay your credit – but they’re not exactly the same thing.
Learn why your FICO score is important, what a good credit score looks like, and more in this handy guide.
What Is A FICO Score?
A FICO score is one type of credit score that ranges from 300-850 for the general risk scale and up to 900 for certain industries. It is calculated based on your credit report, which covers your credit card activity and current debt situation. Your score tells lenders how reliable you are at paying your debt, and therefore, whether or not they should loan you money.
Introduced by the Fair Isaac Corporation in 1989, FICO was the first general-use credit scoring system. It continues to be one of the most popular credit scores today – more than 90% of lenders use FICO to determine whether or not you’re eligible for credit.
All three major credit reports – Equifax, Experian, and TransUnion – include your FICO score. The Fair Isaac Corporation regularly releases updates to its scoring model to make it fairer and more reliable. The latest edition is the FICO Score 9, although some lenders might still use FICO Score 8 or even older scores.
There isn’t just one single FICO score, either. The Fair Isaac Corporation has dozens of different scores, including old and new versions of the general risk score. There are also industry-specific scores for mortgages, auto loans, bank cards, and more. Credit bureaus may provide up to 21 different FICO scores to lenders, which helps them make more informed decisions about whether or not to approve your loan application.
Your FICO score is one of the most important scores based on your credit report. The higher your FICO scores, the more likely you will get favorable loan terms such as loan amount, loan period, and interest rate. It can also decide whether or not you get approved for credit cards.
Why Are FICO Scores Important?
Your FICO scores are used by almost any financial institution, including banks, credit card companies, and insurance providers to determine how likely you are to repay your debt.
This three-digit number decides whether or not you can take out loans, apply for a credit card, or buy a house. So it’s no surprise that people go to great lengths to protect their credit score – if you don’t, you could be effectively costed out of credit thanks to higher interest rates or even be denied applications altogether.
Here’s another way to put it: having a decent credit score impacts how many loan products are accessible to you. If you have excellent FICO scores, you have much more flexibility and control over your financial decisions. You can shop around different loan providers, compare products (e.g. credit cards, housing, insurance), and maybe even negotiate loan terms. You’ll also qualify for lower rates and insurance premiums, which effectively makes it easier and cheaper to borrow money.
There are two important things to note here. One, your FICO score isn’t the only factor that lenders use to make a credit decision. They may also factor in your income and the type of credit you’re applying for.
Two – and this might be controversial for some – you don’t always need a credit score. Sure, it’s important if you want to take on debt, and a bad score makes it difficult to borrow money; but if you’re not borrowing money or applying for a credit card, then you don’t need credit scores.
Factors That Affect Your FICO Score
We all know that your FICO score is calculated based on your credit report, but if you want to improve (or maintain) your scores, you need to know what specific factors impact them. The Fair Isaac Corporation has never provided a detailed breakdown of the method used to compute credit scores, but they have released the criteria they use for Fico Score 8 and 9.
Here are the five main categories that affect your FICO credit scores:
Payment history (35%): The biggest chunk of your FICO score is based on whether or not you pay on time. Late payments can seriously hurt your scores, so make sure that you pay off your debt as soon as you can. Bankruptcy is also counted under payment history.
Amounts owed (30%): The size of your debt – and how much of your credit you use (also known as the credit utilization rate) – is another significant factor in your FICO scores. According to credit experts, it’s best to keep your credit utilization rate under 30% for good scores and 6% for excellent scores.
Length of credit history (15%): Your credit history refers to the age of your credit accounts. This evaluates how long you’ve had your oldest account, when you last opened a new account, and the average age of your credit. The longer your credit history, the more reliable you’re assumed to be.
Credit mix (10%): It’s important to have credit diversity, which makes up 10% of your credit scores. A healthy credit mix includes different types of accounts such as auto loans, mortgages, and credit cards.
New credit (10%): Whenever you apply for new credit or even inquire about your credit scores, it could damage your FICO.
What Are Good Credit Scores?
The Fair Isaac Corporation scores people from 300-800+, depending on the type of credit you’re applying for. Here are the score ranges for FICO 8 and 9:
The average FICO score reached a record high in 2019 at 706, which is a “good” rating. Most lenders find 670+ scores as a sign of creditworthiness. As the number increases, you’ll more likely qualify for better rates and offers. At the highest score bracket, you may even get security deposit waivers and other benefits!
As we mentioned earlier, FICO is just one score. Many others use different scoring models or base their scores on different credit reports. For example, VantageScore also uses a range of 300-850. But a “good” rating starts at 700, instead of 640. Proprietary models (like Experian’s PLUS score) also exist but are less commonly used by lenders.
The bottom line is FICO is just one way to score your credit history, but it’s also the most important. A majority of lenders will take your FICO scores into account when making decisions, so it’s still the best and most accurate way to estimate your creditworthiness in the eyes of financial institutions.
Tips For Increasing Your FICO Score
Check your credit report regularly for errors and discrepancies. If you can spot these errors quickly, you can mitigate any damage to your credit score. You can correct an erroneous credit report by contacting the bureau/reporting agency and the relevant lenders.
Pay your bills on time. Even a few days can dock your FICO score for a long time. All missed payments are kept on your credit report for seven years, so there are negative consequences even if you do eventually pay it in full.
If you can’t pay your debt completely, try to reduce it as much as possible. At the very least, pay the minimum amount due on your monthly credit statements. Prioritize high-interest accounts first.
Don’t open a bunch of new credit accounts to increase your FICO scores. Closing old unused accounts impacts your length of credit history, so avoid doing that as well.
Be consistent. If you’ve made money mistakes in the past, it will take a long time for your FICO scores to recover. But if you keep paying on time and manage your credit well, your scores should go up.
Your FICO score signals to lenders how likely you are to pay off your credit, which in turn helps them decide if they should give you credit or not. Knowing your FICO scores is a step towards being more financially responsible.
Interested in learning more about your FICO score and how to improve your creditworthiness? Build a better credit score today with Wesley Credit Repair!