What is a FICO score? A FICO score is a number to determine the risk to lend you money. Essentially the lenders try to use the number to predict whether you will pay back the money on time or not. So the number may affect if a loan is approved and, if so, the interest rate of the loan. FICO scores range from 300 to 850. The higher your score the better you tend to look to lenders.
The name comes from the company that developed the credit score model, the Fair Isaac Corporation.
Who calculates the number?
There are three main credit reporting bureaus: Experian, TransUnion, and Equifax. Each company has their own version of a FICO score based on the information that they have on file about you. You can also receive a score directly from FICO.
How is this number calculated?
- Payment History — This is an important aspect of the FICO score. It tells lenders whether or not you’ve paid past credit accounts on time. Account types used in this are: credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. It also factors in bankruptcies, foreclosures, liens, judgments, etc. It takes into account how late the payments were, how much was owed, how recently they occurred, and how many there are.
- Amounts Owed – Owing money on credit accounts isn’t necessarily negative. However, if a large percentage of your credit has been used, it may indicate that you’re overextended and likely to miss payments. This section considers the amount owed on all accounts. It also takes into consideration the amount owed on different types of accounts, for example, credit cards and installment loans. They also look at how many accounts have balances, and whether or not you frequently max out your accounts.
- Length of Credit History – Generally speaking, a longer credit history will increase your FICO score. However, this is not always the case, as they pay attention to the rest of your credit report too. This section factors in how long your credit accounts have been established, how long specific credit accounts have been established, and how long it’s been since you used certain accounts.
- Types of Credit in Use – This takes into consideration the mix of accounts you have. This doesn’t mean you need to have one of each, but if you do not have a lot of other information in your credit report, this will hold more weight. They pay attention to how many types of each account you have. Keep in mind that people with no credit cards tend to be viewed as a higher risk than those who have had them and managed them responsibly.
- New Credit – Opening several new accounts in a short period of time usually represents a greater risk to lenders, especially for people who do not have a long credit history. This section of the scoring factors in how many new accounts you have by type of account. It also pays attention to how many inquiries into your credit report or score you have had in the last 12 months (due to you applying for credit.)
What does my FICO score ignore? Similar to a credit report, the FICO score does not include your ethnicity, religion, salary, etc. It also excludes your marital status, national origin, age, employment history, where you live, rental agreements, or any interest rate charged on a particular credit card or account.
The FICO score also does not account for any consumer-initiated inquiries, promotional credit inquiries, or any inquiries from employers. Additionally, anything that is not on your credit report will not be included.
Why is my FICO score important? Your FICO score is a quick way for lenders to determine whether or not you are worthy of receiving credit. Some of the benefits of having a good FICO score typically include: *a loan may get approved *interest rates are lower overall *a bad score may affect your employability, housing opportunities, insurance rates, and more
It may also benefit you to know your FICO score, as it could prove to be empowering. The more you know about your score, the more confident you may feel going into a negotiation, and the less likely you may become a victim of predatory lending.
How can I improve my FICO score? It is important to point out that there is no quick way to fix your FICO score. In fact, you should avoid using any company that promises to quickly fix your credit report and score. Generally, the best solution is long term money management. You should focus on paying your bills on time, reducing your debt, and eventually get out of debt all together. This will improve more than just your FICO score. To get started, you should check your credit report for errors. If there are any errors in the report, it can negatively impact your overall score. Next, set up payment reminders on all of your accounts. Many banking institutions offer email or text reminders when bills are due. You should take steps to reduce the amount of debt you owe. First you should make the minimum payments to all your accounts to avoid default. Then start with the accounts that have the highest interest rates. Pay off those accounts first, as that debt will get bigger faster.
Another way to improve your score is to get a higher credit limit on your credit cards. This does not mean that you should max out your cards to this limit, but if a lender sees that you were given this higher limit without going further into debt, it could improve your overall score.
What else should I know about my FICO score? Your score changes as your credit report changes, so if you are having a hard time with your credit right now, it doesn’t mean it will be that way forever. Over time, bankruptcies, late payments, and other negative aspects will be removed from your credit report, causing your score to improve. Also, the importance of the factors that determine your score changes as your credit report changes. This makes it difficult to measure exactly how each factor will contribute to your score without looking at your entire credit report. This means a late payment for one person may carry more weight than a late payment for another person.
Finally, a FICO score may not be included in a free credit report. You can receive a free credit report annually from each of the three major bureaus, but it may cost extra to find out your score.