A FICO score is a brand of credit score that many lenders use to judge an applicant’s creditworthiness. FICO scores are on a scale of 300 to 850 with higher credit scores being better than lower credit scores. The FICO score is based on a person’s credit report – the document that compiles several years of credit card, loan, and debt collection information.
Factors That Influence FICO Score
The FICO score is calculated based on five key pieces of information:
- 35% of the FICO score is based on the person’s payment history. Falling behind on payments, especially beyond 90 days, can severely hurt a person’s credit score. Serious default like bankruptcy, foreclosure, repossession, and charge-off also indicate a poor credit history and weigh heavily into a person’s FICO score.
- 30% of the FICO score is based on a person’s level of debt. The FICO score considers each credit card balance and credit limit. The closer credit card balances are to the credit limit, the more a FICO score is hurt. The same thing goes for loans and loan balances. Having loans close to the original loan amount can negatively affect a person’s credit score.
- 15% of the FICO score is based on age of credit history. This takes into account how long a person has been using credit – the longer the better since is shows a person has a lot of experience with credit. The FICO score also looks at the average age of credit history which can be lower if new accounts have been opened recently.
- 10% of the FICO score is based on the types of accounts a person has. People with the best FICO scores have experience with both revolving accounts and installment accounts. Having a mortgage on your credit report can help boost your credit score, if the payments are on time of course.
- The last 10% of the FICO score is based on credit inquiries. An inquiry is placed on your credit report each time you apply for credit. More inquiries could indicate that you’re either desperate for credit or taking on too much credit at one time. Your credit score is penalized for too many credit inquiries.
How a FICO Score is Used
Lenders use the FICO score to quickly decide if an applicant might qualify for a loan. Most lenders have a FICO score cutoff and can quickly tell which applicants definitely will not be approved for a loan. If an applicant meets the FICO score criteria, the lender takes a look at other factors like income, debt, and ability to repay, to decide whether to approve the application.
FICO scores are also used to assign interest rates. Applicants that have the best FICO scores typically pay the lowest interest rates while applicants with lower FICO scores pay higher interest rates, assuming they’re approved. Interest rate is important, especially with mortgages and auto loans because the interest rate affects your monthly payment. The lower your interest rate, the lower your payment will be. Borrowers with low credit scores pay higher monthly payments on the same loan amount.
Each person actually has more than one FICO score because there’s one FICO score for each credit report that you have. Lenders typically consider credit reports from three major credit bureaus – Equifax, Experian, and TransUnion. Your FICO score for each credit report could be different because the companies that report information to the credit bureaus don’t always report to all three. It’s common for there to be discrepancies between your three credit reports even when a creditor has reported to all three bureaus. Lenders commonly utilize the middle score of the three bureaus to determine if you have a good credit score.
Both Equifax and TransUnion allow you to purchase your FICO score based on their credit report data. These can be purchased through myFICO.com. Unfortunately, Experian does not allow consumers to view their FICO scores based on Experian credit report data. Lenders are able to view and make decisions about your FICO score based on all three credit reports.