Your FICO score is one of the most important factors that lenders use when deciding whether or not to approve you for a loan. So, it’s essentially a numerical representation of your creditworthiness, but how are these three digits determined? And how can you work to keep them as high as possible?
Here, we’ll discuss everything you need to know about your FICO credit score and its ranges. So, let’s first start with the basics and answer what a FICO score is.
Your FICO rating is a number that represents how responsible you are as a borrower. It’s widely used by lenders to determine whether or not you are a good candidate for a loan. Your FICO score can range from 300 to 850, with the higher numbers representing a lower risk to the lender. A good FICO score is generally considered to be anything above 700.
If you’re looking to improve your FICO score, there are a few things you can do. First, make sure you always make your payments on time. Second, try to reduce the amount of debt you owe. Third, keep track of your credit report and dispute any errors you find. And fourth, avoid opening too many new lines of credit at once as this can lead to a decrease in your score.
What Exactly is a FICO Score?
A FICO score is a credit score developed by Fair Isaac Corporation. It is used by creditors, such as lenders and credit card companies, to determine an individual’s creditworthiness. A high FICO score means you’re a low-risk borrower, which could lead to a lower interest rate on a loan or credit card.
There are five factors that impact your FICO score:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%).
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. And in case you are unfamiliar with your FICO score remember you can get it for free from Experian.
What is the FICO Score Ranges?
FICO credit score ranges from 300 to 850, with 850 being the highest possible score. The average score is 723 and there are 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 and from 670 to 740 is a good score. If you have a score above 740 to 800 it’s in a very good range. A FICO score above 800 is an excellent one.
But what to do if your score is not in this good range? If this is your case that doesn’t mean 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 more negotiating room there is with a lender.
How is a FICO Score Calculated?
We certainly did thoroughly cover the basics but how is the fico score actually calculated?
This number is calculated using a number of factors we already mentioned. Out of all of them, payment history is the most important one in your FICO score calculation, so it’s essential to make all of your payments on time.
Credit utilization is also a key factor, so you’ll want to keep your balances low relative to your credit limit. Credit mix and length of credit history are also considered when calculating your FICO score. Having a diverse mix of loans and lines of credit can help improve your score, as can having a long credit history.
How to Get a FICO Score
You can easily get your free credit report from one of the major credit bureaus and this will also include your fico score.
In order to receive a valid FICO Score, the credit report must have:
- At least one account opened for six months or more.
- At least one account that has been reported to the credit bureau within the past six months.
- No indication of the deceased on the credit report.
If you have a high score, you’re in good shape. But if that’s not the case you better take the necessary steps to improve it.
Why Does a FICO Score Matter?
Your FICO score is one of the most important factors in determining your creditworthiness. A low FICO score indicates you’re a high-risk borrower, which could lead to the rejection of loan and credit card applications.
By definition, there are three main types of FICO scores: base, industry-specific, and custom. Base FICO scores are the generic scores used by most lenders. Industry-specific FICO scores are tailored to specific industries, such as auto loans or credit cards. Custom FICO scores are created for individual lenders and take into account their unique lending criteria.
It’s important to keep an eye on your individual score because it can change over time based on your financial behavior.
What Factors Influence Your FICO Scores?
This score is influenced by a number of different factors, including your payment history, credit utilization, length of credit history, and more. Here’s a closer look at how each of these factors affects your FICO score:
- Payment history. Late or missed payments will negatively impact your score, while a consistent history of on-time payments will improve it.
- Credit utilization. This refers to the amount of credit you’re using compared to the total amount of credit available to you. A lower credit utilization ratio is better for your score, so try to keep your balances low.
- Length of credit history. A longer credit history generally means a higher score, so it’s important to keep old accounts open and active.
- Credit mix. Having a good mix of different types of accounts (e.g., revolving and installment) can help boost your score.
FICO Score vs. VantageScore: How Do They Differ?
If you are just starting to understand what a 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 an alternative to a FICO by a few big credit agencies.
The main difference is in how the scores are calculated. FICO takes into account five crucial factors and VantageScore does the same thing just weighs them differently.
Essentially it gives more attention to your payment history and length of credit history than other factors and that’s why these two numbers will not be the same.
Whether you are searching 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 options as well.
So, make sure before even considering taking any type of loan to do your research and consult a financial advisor regarding your score to make sure you get the best deal. Improving your FICO score can take some time and effort, but it will be very well worth it if it means getting approved for a loan with better terms.