What Is A FICO Score?

IN THIS GUIDE

If you’ve ever opened up a credit card, taken out a personal loan, or applied for a mortgage then you’ve seen your FICO score frequently mentioned. The FICO score was the first universal measure of a consumer’s creditworthiness. To this day, it remains the most common metric used among credit bureaus in all different fields. Its importance has grown over time as credit becomes more common in society.

A FICO score carries a lot of weight. It determines how much money you can borrow, how long you have to pay that money back, and what your interest rates will be. If you’re looking to borrow right now, plan to borrow in the future, or have borrowed in the past, it is suggested to keep an eye on your FICO score and have a complete understanding of how it works.

What Is A FICO Score?

The FICO score was created by Fair Isaac Corporation (FICO) to provide an industry standard for credit scores. The FICO score is a summary of your credit report and examines a person’s financial and credit history to determine a number rank between 300-850.

This number given, based on credit history, can help determine the financial capabilities of a borrower. It is used by lenders to measure the risk level of lending to a specific person. While the FICO score is not the only credit score available, it serves as a significant landmark score for all lenders.

What Is The Difference Between A FICO Score And A Credit Score?

A FICO score is just one type of credit score. Both credit scores and FICO scores aim to measure financial health using a simple, numerical scale that pulls from a person’s financial history. Any type of lending, from hard money loans to commercial property loans to personal loans, will directly impact your FICO score.

There are a lot of different credit scores, though. Each credit score system uses different metrics and weights to determine financial health. VantageScore is another popular credit score system (developed by Equifax, Experian, and TransUnion together).

The main difference between credit score measures is how much weight a financial factor carries. For example, a FICO score places more importance on payment history whereas VantageScores places less importance on it.

While the FICO score is most widely used, a financial institution might use a different credit score depending on what is most important to them. For example, VantageScores places high importance on credit usage and credit debt. If this is the chief consideration for a creditor, they might look at the VantageScores rather than the FICO score.

Why The FICO Score Is An Important Metric And What Is It Used For?

The FICO score is an important metric because it utilizes information found in a consumer’s credit report to determine how much they can borrow, the interest rate they receive, and how many months they have to repay a loan.

A FICO score can be used to determine a consumer’s creditworthiness when applying for a personal loan, mortgage, credit card, or any form of financial borrowing. There may be a lot more that goes on in the underwriting process, depending on the investment sought, but a FICO score will be considered.

What Is Considered A Good FICO Score?

Here is the standard metric used to determine whether a FICO score is good or not:

  • 580-669 is fair.
  • 670-739 is good.
  • 740-799 is very good.
  • 800+ is exceptional.

 

According to the company’s website, a good FICO score lies between 670 and 739. Different lenders might go by different parameters when looking at a FICO score, however.

The average FICO score for Americans in 2021 was 716, which is listed as a good FICO score.

Why Are There Different FICO Scores?

The FICO score was first introduced to society in 1989. Since then, the economy has continued to drastically change and develop. To address these shifts in economic trends, FICO frequently updates the method used to determine the score.

FICO Score 8 and Fico Score 9 are the most widely accepted FICO scores. FICO Score 2, FICO Score 4, and FICO Score 5 are common in mortgage lending. Whereas, FICO Auto Score 9 and FICO Auto Score 8 will be used more often when purchasing a car.

What Affects Your FICO Score And How Can You Improve It?

Missed payments, late payments, credit available, and opening new credit accounts can all affect your FICO score.

There are a lot of directions you can take to improve your FICO score, but here are some good first steps to take while trying to improve it:

  • Check For Errors. First, make sure that there are no errors in your credit history. You can dispute inaccurate or misinformation on your credit history for an adjusted score.
  • Make On-Time Payments. Payment history is typically the largest factor when determining your FICO score. Try to make all your payments on time, if you are unable to then contact a financial counselor or advisor for additional support. Keep an eye on collection accounts and missed payments—keep all accounts current.
  • Reduce Debt Owed. Having revolving debt or more credit cards with higher credit available might hurt your credit score. It is best to pay down credit cards, loans, or mortgages directly and as efficiently as possible.

 

There are a lot of different methods to improve your credit score, but these are some highly recommended starting points for anyone. It’s important to keep an eye on your FICO score, regardless of your credit. It is a lot easier to maintain a good FICO score, that to improve it after it drops.

How Do I Get My FICO Score?

FICO works with over 200 financial institutions to help consumers get access to their FICO scores. Many banks, credit card issuers, and investors grant access to your FICO score through their mobile applications or website.

American Express, Bank of America, Citi, Discover, and Wells Fargo all offer access to their cardholders. Discover Credit Scorecard and Experian Boost offer free access to your FICO score.

There are also credit-monitoring services that will provide regular updates to changes on your FICO report.

How Is A FICO Score Calculated?

Here are the standard metrics that are used when calculating a FICO score:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length Of Credit History (15%)
  • Credit Mix (10%)
  • New Credit (10%)

 

Every FICO score is unique, though. For example, a person who has brand new credit will get different calculations than a person who has a long credit history.

How Often Does A FICO Score Update?

Your FICO score will update any time new information is sent from your creditors. This means, theoretically, your score could change several times a month as your credit card issuers or loan providers send new information to the credit bureaus.

Typically, though, information is sent to the credit bureaus every 30-45 days. Your score is likely to update once a month unless you have a lot of different creditors. Different creditors might send information at different times.

Conclusion: What Have We Learned About Your FICO Score?

Your FICO score is a valuable tool to determine your creditworthiness. It is influenced by several factors, with payment history and the amount owed carrying the most impact. Whether you’re looking to take out a personal loan, looking for a business line of credit, or looking at purchasing property, your FICO score will be influential. While improving a FICO score might take time, with a little dedication it is doable.

A large majority of credit issuers will examine your FICO score to determine your loan amount, interest rate, and how long you have to repay it. This is why it is important to keep an eye on your score, watch how it might fluctuate over time, and understand why it does so. Practically all past, present, and future investments are connected to your FICO score.

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