FICO Score

FICO Score
A FICO score is a credit score developed by the FICO company. These scores are created using information from a person’s credit report about their history of using credit and managing debt.

What is a FICO score?

The FICO score was created by Fair, Isaac & Company in 1989. (Their name was shortened to FICO in 2003.) FICO scores are used by lenders to help predict a borrower’s behavior and assess their creditworthiness. Lenders can use a borrower’s FICO score to determine whether they are likely or not to pay their bills on time and how much credit they will be able to handle. Scores developed by FICO can also be used to forecast if a specific borrower’s account could end up included in a bankruptcy filing.[1]

While there are other kinds of credit scores in addition to FICO, most lenders still use FICO scores when deciding whether to offer you a loan or credit card. They will also take your score into account when deciding the terms of your loan, especially the interest rate. Banks may also use FICO scores when approving checking and savings account applications and setting the terms of those accounts.[2]

FICO scores range anywhere between 300 and 850; and the higher the number, the better with a score. While any loan carries risk for both the borrower and the lender, borrowers with high FICO scores are considered by lenders to be a relatively safe bet. For borrowers, that high score translates into more loan approval, lower interest rates, higher maximum limits, and more favorable terms.

How do I know if I have a good FICO score?

Basically, if you have a FICO score that’s 680 or above, you have a good score. And if you have a score that is 720 or above, you have a great score. While these ranges are not 100% official, here are the five basic tiers:

RangeQuality
720-850Great Credit
680-719Good Credit
630-679Fair Credit
550-629Subprime Credit
300-549Poor Credit

How are FICO Scores created?

FICO scores are based on the information collected by the three major credit bureaus : Equifax, Experian, and TransUnion. This information is put together into a document called a credit report. The report tracks a person’s history of credit use over the past seven years. It includes information their payment history, their amounts owed (both past and present), the length of their credit history, their recent credit inquiries, and their mix of different credit types.

When FICO creates a person’s credit score, they weight some of these factors more heavily than others. The breakdown looks a little something like this:

Payment History — 35%: Does a person have a good track record of making their payments on time? This category also includes information on whether or a not a person has ever had an unpaid account sent to a debt collector.

Amounts Owed — 30%: This looks at how much debt a person currently has outstanding. It also takes into account how much credit a person has used in relation to the maximum amount they have available.

Length of Credit History — 15%: How long has a person been using credit? All other factors being equal, a longer history is generally better.

Credit Mix — 10%: This factor takes into account the different kinds of credit that a person uses: from personal, auto and home loans to credit cards, student loans and lines of credit.

New Credit Inquiries — 10%: This category includes any requests for new credit that a person has made. Generally, too many credit inquiries in a short period of time is seen as a red flag.[3]

Is the information on my credit report always correct?

No. Credit reports can and do contain errors or false information, like a collections account that was settled but is still being reported as open. It’s always a good idea to check your credit report personally to make sure that all the information on it is correct. If you find an error, you can dispute it with the appropriate credit bureau.[1] Under federal law, each bureau is required to provide each individual with one free copy of their credit report per year. However, they will only provide the report if you request it. To request a free copy of your credit report, just visit AnnualCreditReport.com.

It’s also important to know that the data on a person’s credit report can vary depending on which credit bureau has produced the report. This means that your FICO score could also vary from one credit bureau to another. FICO also has different variations on its basic scoring model, which are tailored to different types of lenders. This means that if you are applying for a mortgage or car loan, your score might be different than it would be if you were applying for a credit card. A borrower could have several different FICO scores, even if they are all calculated from the same credit agency’s data.[3]

How can I figure out my FICO score?

There are four main ways a borrower can check their FICO score. First, borrowers can check their credit card or loan statement.  Many major credit card companies and some auto loan companies have begun to provide FICO scores for all their customers on a monthly basis.[4] Second, a non-profit credit counselor can provide a borrower with a free credit report and FICO score. Not only that, but they can help people interpret their score and the information contained their credit report.

Third, a borrower can use one of the many websites that have an offer for a “free credit score.” Some of these sites are funded through advertising and not charge a fee. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score.[4] Lastly, you can buy your score directly from one of the three main credit reporting companies or from FICO themselves.

What can I do to change my FICO score?

If you have a lower credit score, it is often referred to as having “bad credit.” This can prevent lenders from giving you a loan or credit card. However, it is possible to change your credit score.

Re-establishing your ability to make a payment on time, only applying for credit that you actually need, not using too much of the credit that is available to you, and checking your credit score once a year are all ways to boost and maintain a higher credit score. In the long term, that higher score will help you get approved for better loans and credit cards, with lower rates and better terms. FICO and credit scores can change over time based on your credit behavior; taking control of what matters is key.

References:

  1. “What is a FICO Score?” Accessed July 16, 2016 Credit.com
  2. “What’s in Your Score?” Accessed July 16, 2016 MyFICO.com
  3. “What is a FICO Score?” Accessed July 16, 2016 ConsumerFinance.gov
  4. “Where Can I get my FICO Score?” Accessed July 15, 2016 ConsumerFinance.gov