Everyone probably has heard the advice to keep your credit good. But what does that entail? What is good credit? To answer, one must be familiar with a FICO score. Often simply called a credit score, a FICO score is the original credit score, but it is no longer the only one. A FICO score is much more than just a number. It is a number reflecting your repayment history that can affect many aspects of your life. When it comes to making any major purchase (car, home, loan), a lender may use a FICO score to see how likely you are to repay them. It is very important to know what a FICO score is and how it is used. Here are seven important details about FICO scores.
What is a FICO Score?
A FICO Score was developed by the Fair Isaac Corporation in 1956 by Bill Fair and Earl Isaac. A FICO score is a brand of credit score based on data in your credit reports. A FICO score is a 3-digit number between 300 and 850, which informs lenders of how likely you are to repay money based on your repayment history. The higher your score, the better your credit score is. FICO score and credit score are often used interchangeably. FICO offers industry-specific scores for credit cards and car loans ranging from 250-900. FICO scores are calculated by applying a proprietary formula to the data in your reports to create a score. Each lender decides what score is needed to qualify for a line of credit. The FICO company defines a good score as 670-739.
How is a FICO Score Used?
Creditors use FICO scores in making decisions about loan and credit card application approval. This information provides them with a history of your past credit usage and paints a picture for future payment patterns. Income is considered, and debt obligations are checked to determine your ability to repay. Even utility companies and potential landlords use credit scores. A good score can grant you a low interest rate and more options.
How is a FICO Score Calculated?
FICO gives guidelines about what factors into a score. Paying on schedule and maintaining low balances account for two-thirds of your score. Payment history is about 35% of your score. Late payments, accounts in collection, or bankruptcy can hurt your score. The amount of debt relative to credit limits is about 30% of your score. This reflects how much of your available credit that you are using. The age of credit is 15% of your score. This is how long you’ve had credit and the age of your accounts. Recent credit applications are 10% of your score. These are called “hard inquiries.” An application can raise your score for six months. Possessing multiple types of credit is 10% of your score. Having both installment loans and revolving credit helps your score. Installment loans have a level of payments like a car loan or mortgage. Revolving credits is like a credit card.
What Types of FICO Scores are There?
FICO scores are just one type of credit score. You can have multiple versions of a FICO score. FICO 8, introduced in 2009, is the most widely used. FICO 9 is the newest. Mortgage lenders typically use older FICO versions. FICO 10 and FICO 10T are new versions of FICO. UltraFICO is a new type of FICO score meant for people with fresh credit or looking to rebuild their credit. It’s on the same 300-850 scale as FICO but uses activity in deposit accounts to calculate a score.
What is a Vantage Score?
Vantage score, introduced in 2006 and developed by three major credit bureaus, is another type of credit score and is the FICO score’s main competitor.
FICO scores are favored by law in home mortgages. FICO is the only tool to evaluate credit risk approved by government-sponsored enterprises like Fannie Mae and Freddie Mac. Personal finance websites, like Nerdwallet, offer a free credit score from VantageScore.
How to Check Your Credit?
You may have access to a free FICO score on your credit card statement. Some credit card issuers like Bank of America give customers free fico scores monthly. Discover has made FICO scores free for any members. You can pay to get a score through FICO on their website
What is a Good FICO Score?
Lenders decide for themselves what is a good FICO score.
Typically, Fico Scores range as follows:
740-799= Very Good
800+ = Exceptional
A FICO score is meant to be a helpful tool to both lenders and borrowers. A FICO score offers a quick snapshot of someone’s credit history that may allow them to obtain something immediately that they could not presently afford. With proper credit management, purchasing a home, buying a car, or getting a loan will be easy. Bad credit leads to fewer credit approvals and higher interest rates. Be sure to check your FICO score and make your important payments on schedule.