What Is a FICO Score?
FICO score is a number that ranges anywhere from 300 to 850 and gives information on how suitable are you for getting a loan. The higher your FICO score is the better your chances of getting a loan from a lender.
Fico is a credit score system created by the Fair Isaac Corporation (FICO). It is a three-digit number that lenders use along with some other information to determine the risk of giving a loan to a borrower. For getting a good score it is important how reliable you were in the past in paying the money back on time. But besides that, it takes into consideration a few other information such as current debt if you have any, duration of credit history, and types of credit.
Without a doubt, payment history is the most important factor in your score. Lenders will always go for a borrower who made their payments on time and in full. How you use your credit is also relevant- it shows how much of your accessible funds are being used and should be kept below 30% if you want a good loan deal.
Like any other, this credit scoring system is used as a sort of a predictive measure of how likely you are to pay out your loan.
How is the FICO Score Determined?
Now that you know what this score is you are probably wondering how is it determined and how can you improve it. The large sum of 35% of your FICO rating is based on your previous payment history. This involves not just did you make your payments on time and in full but also whether are there any other marks such as bankruptcies.
The credit utilization factor is the other factor influencing your FICO score. This one is the easiest to improve. The term stands for a ratio of your credit to your total debt and is expressed in percentage. Simply put, let’s say you are at 40%. It means that you are using 40% of the credit available to you. If this is the case for you, we suggest you lower your spending.
Additionally, your score is also based on your credit history. Borrowers who have been using credit longer have better scores. Other factors regarding credit can also influence this score.
What Is a Good FICO Score?
Generally speaking, any score above 700 will be considered good but don’t forget that lenders take into consideration a few other factors like your current employment and income before giving you a loan. This score is essentially representing your creditworthiness or how suitable are you for getting a loan or how likely is it that you’ll pay it on time.
If your score is not that good, don’t lose hope. As we discussed there are many things you can do to improve your score such as paying everything on time, keeping your old accounts open, and keeping your credit utilization low.
Another thing you can do is to keep your credit card balance low. A higher balance can bring down your score.
Don’t forget there is a way you can view your FICO score for free. These services are usually offered by credit card issuers and will update you on your score every 30 days.
What Are the FICO Score Ranges?
FICO score can be anywhere from 300 to 850, but what does this range mean? Firstly, it’s important to say that it can be divided into five categories, going from poor to excellent.
- If your score is between 300 and 580 it is considered poor.
- A score from 580 to 670 is fair.
- From 670 to 740 is a good score.
- If you have a score above 740 to 800 it’s in a very good range.
- FICO score above 800 is an excellent score.
But what to do if your score is not in this good range? That doesn’t mean that you will not be able to get a loan, but probably means you will pay a higher interest rate. Definitely, the higher your score is, the better interest rates will be.
Regardless of what your FICO score is, don’t forget that there are other factors that a lender will consider before giving you a loan. You should keep in mind elements like your income, employment, and credit history.
What Factors Affect a FICO Score?
As previously mentioned, there are many factors that can have an effect on your FICO score. No matter the lender you choose, any late payments in your history or bankruptcies can set you back. Keep in mind how much credit are you spending, as we already discussed what kind of impact can this have on your overall score. Before you apply for any loan look into your credit history and the type of accounts you own.
Why Is a FICO Score Important?
Many people will tell you this score is important but they can’t really explain why is it so necessary in everyday life.
This score plays a big role because it’s the first thing a lender will look at while considering your loan application. A low score leads to a higher interest rate or even a denial. We recommend that you keep a track of your score and be sure you understand what factors affect it.
Even if you don’t want to apply for a loan, your FICO score may still be important because it also determents whether you can be approved for a credit card or not.
FICO Score vs. VantageScore: What’s the difference?
If you are just starting to understand what credit score is, you may be confused about the different types to exist. Even though FICO and VantageScore are both credit scoring systems there are a few differences between the two. Although a FICO rating system is most commonly used, some lenders may require your VantageScores system rating. This scoring was created as the alternative to a FICO by a few big credit agencies.
There is a difference in how these scores are calculated. FICO takes into account five crucial factors:
- Payment history,
- Credit utilization,
- Length of credit history,
- New credit accounts,
- Credit mix.
As for VantageScores, this system weights these same factors differently than FICO, giving more attention to your payment history and length of credit history than other factors.
Whether you are looking for a loan or not, looking into your FICO score can’t hurt. FICO is a current standard in determining whether you are suitable to get a loan or not. A poor score can cost you not only a good loan deal but limit your credit card option.
So, make sure before even considering taking any type of a loan to do your research and consult a financial advisor regarding your FICO score to make sure you get the best deal.