Everything You Need to Know About FICO Scores
Whether you’re applying for an apartment, auto loan, or new credit card, you should know about your FICO score. Let’s demystify the numbers (and letters!) behind this popular financial tool.
Table of contentsWhat is a FICO score?Why is my FICO score important?What is a good FICO score?What factors determine the FICO score?What’s the difference between a FICO score, a credit score, and a credit report?4 ways to improve your FICO score
What is a FICO score?
A FICO score is a three-digit number based on your credit history that banks and other institutions use to determine potential credit risk. FICO is a brand name: It stands for Fair Isaac Corporation, the company that introduced the first credit score in 1981. (In 2009 it changed its name to FICO.)
There are other companies that produce credit scores (although FICO is the most popular), and FICO produces more than one type of score: the FICO Small Business Scoring Service (FICO SBSS) for small businesses, the FICO Bankcard Score for credit card issuers, the FICO Auto Score for auto loans, and the best known FICO score: the FICO base score for individuals.
Why is my FICO score important?
Your FICO score is the number that banks, credit card issuers, auto loan issuers, and insurance companies use when making lending decisions: whether or not to loan you money, how much interest they’ll charge, and how high your insurance premiums will be.
If you have a low FICO score, banks might consider you “risky,” and charge you higher interest rates, or deny your application for credit. Insurers might charge higher premiums. If your FICO score is high, you’ll receive higher credit limits and more favorable interest rates.
Even if you don’t plan on buying a car or a home for a while, your FICO score still matters: Landlords often look at this number before renting out an apartment.
What is a good FICO score?
FICO base scores range from 300 to 850. Depending on the individual lender or insurer, you may see different standards, but generally a FICO score above 800 is considered excellent; “very good” FICO scores range from 740 to 799; a “good” score ranges from 670 to 739; and 580–669 is considered “fair.” Any score below 580 is considered poor.
Other types of FICO scores may have different ranges. For example, FICO SBSS scores range from 0 to 300 and FICO Auto scores range from 200 to 900.
What factors determine the FICO score?
There are five factors that affect your FICO score:
Payment history: This accounts for the largest chunk of the FICO score (35%) and includes your on-time payments, late payments (and how many days late they were), and bankruptcy. Basically, the most important part of your FICO score is paying your bills on time.
Accounts owed: This is the second largest part of the FICO score (30%) and has to do with how much money you currently owe on your credit cards and loans. The number that’s important here isn’t your total debt, it’s your credit utilization, or the amount of money you owe relative to your available credit.
Average age of credit: The age of your credit accounts for 15% of your FICO score. The longer you’ve had a credit card, the better your score will be.
New credit: This makes up 10% of your FICO score and refers to any recent checks on your credit report. If you apply for a lot of different credit cards and loans, that can look risky to banks. (This does not include soft inquiries, which are requests you make yourself.)
Credit mix: The final 10% of your FICO score is determined by types of credit accounts. Having a mix of different types of credit, for example student loans, credit cards, and a car loan, can be better for your credit score than only having credit cards.
Your FICO score does not take into account your net worth, employment status, or salary.
What’s the difference between a FICO score, a credit score, and a credit report?
The FICO credit score is just one type of type of credit score. It is the most popular one, so the terms “FICO score” and “credit score” are sometimes used interchangeably. Credit scores use information in your credit report to predict how likely you are to pay your bills on time.
Credit reports are produced by a few different major major credit bureaus. A credit report is a more comprehensive document that covers your full credit history. Consumer credit bureaus collect the data that FICO and other credit scores use.
4 ways to improve your FICO score
If your FICO score is lower than you want it to be, there are a few ways to safely build credit. Here are four easy ways to get started.
Pay your bills on time. Paying bills on time might seem obvious, but not only will it help you avoid debt, but it will keep your FICO score high.
Don’t close all your credit cards at once. If you’ve gotten into credit card debt, it can seem like the right move to close all your credit cards at once. But that could negatively impact your FICO score, since one of the factors is the age of your credit.
Check your credit score. Many services will allow you to check your credit score, so you can stay on track and be aware of any changes or mistakes.
Ask for a higher credit limit. Since one of the factors determining your credit score is credit usage (i.e., how much of your credit limit you actually spend each month), the higher the credit limit, the better your FICO score. (Just remember to keep your usage low.)
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