What Is a FICO Score?

If you’ve ever tried to get a loan, or applied for credit you’ve probably encountered the word “FICO score” mentioned on multiple occasions.

If, however, you’re just getting your credit established or haven’t been attentive to your credit score in the past, understanding what FICO represents and the signifies can be a challenge.

This article explains everything you need to know concerning FICO scores. It explains the definition of FICO scores and how they are calculated, the various kinds of FICO scores and what they are used for. We also go over other, less frequently used forms of consumer credit scores, and what they are compared to FICO scores.

What is FICO mean?

FICO is an acronym that stands for Fair Isaac Corporation, the company that invented the FICO score. The company was established in 1956 by an engineer Bill Fair and mathematician Earl Isaac. Their goal was to develop an automated system to evaluate the risk of consumer credit.

Today it is the FICO score is the most frequently employed credit score in the United States and has become an established method of rating creditworthiness.

What is a FICO score?

FICO scores are used as credit scores by more than 90 percent of credit card issuers and lenders to decide whether to approve your application for loans or credit card.

The Fair Isaac Corporation gets information from the three credit agencies (Experian, Equifax, and TransUnion). They use the data in your credit report to determine three distinct FICO scores for each bureau.

As the information in your credit report changes as the information in each report changes, the information in your credit report will change, and so your FICO score will change too. It can change month-to-month, or even day-by -day as your creditors record new activities to your credit report.

Different versions of FICO Scores

FICO frequently updates their algorithm used to calculate the FICO scores. When they update, they upgrade to a new version of FICO. At present, the most current version is FICO 9. It includes a variety of changes to the way certain things are considered in the credit score. Particularly:

• Paid collections are no longer a cause for negative effects.
• Medical collections accounts have less of an impact on the environment.
• The rental history, if it is reported by your landlord is now considered. This will allow renters establish a credit history that is positive even in the absence of other types of credit.

What’s the FICO score range?

FICO scores vary between 300 and 850 and higher scores indicate less risk to credit. Here’s the breakdown of the score range:

• 300-579: Poor credit
• 580-669: Fair credit
• 670-739 Good credit
• 740-799 Excellent credit
• 800-850: Excellent credit

Be aware that the exact credit score ranges utilized by lenders could differ and lenders may use their own standards to evaluate the risk of credit. In addition, the exact credit score required to be able to be able to get a specific credit or loan may differ depending upon the lender’s underwriting guidelines and other aspects.

Different kinds of FICO Scores

Beyond the normal changes that occur when the credit scoring model of FICO is revised There are also a variety of kinds of FICO scores. Each is designed to assist lenders identify specific types of risk to credit. The most popular types are:

• Auto Score： will determine the likelihood that you will fail to pay back a car lease or loan
• Mortgage Score： is a measure of how likely you are to be in default on the mortgage loan
• Credit Card Score： determines the likelihood you are to fall into default on your credit card or store charge card account
• Installment Loan Score： is a measure of the likelihood that you will fail to pay off an installment loan of a significant amount
• Personal Finance Score： is a measure of how likely you are to be in default on a loan with a smaller amount

For each of these types of credit scores, a particular set of FICO scores are used, which are not the same as the standard FICO score.

Additionally these scores also assess the probability of your default within the two years to come but only for their specific purpose. For instance an Auto FICO score will only evaluate the risk of bankruptcy on the auto loan and not on your mortgage.

Multiple versions of industry-specific FICO Scores

To make things even more complicated, FICO regularly updates these special credit scores for specific industries to ensure they are more precise. Similar to the overall FICO score there are different versions of each specific industry-specific FICO score.

This means that an average person doesn’t only have one or two scores. In reality everyone has a multitude of FICO scores.

This is among the numerous reasons a lender might reject a credit application, while another one approves the same type of application. Different versions of the FICO score, or the same score obtained from various credit bureaus will nearly always differ.

How FICO scores be calculated?

Fortunately that conventional FICO scores are calculated with a relatively similar method that is consistent from one edition to the following. The basic breakdown of the method used to calculate them can be described as follows:

• Payment History 35 percent
• Amounts Due by 30%
• Length of Credit History 15 percent
• New Credit – 10 percent
• Credit Mix 10 percent

As you can observe, the vast majority of the issue comes down to the history of your payments and the amount of debt you carry, as well as the length of time you’ve been able to get credit in your name.

While industry-specific scores may weigh things differently, these major elements will remain important when the calculation of the FICO score.

Knowing the FICO Score Calculation in Detail

As previously mentioned, FICO scores are calculated by analyzing five major factors. Let’s take a look at each one of these factors and how they impact the credit score of yours:

Payment History (35 percent)

This is the biggest aspect that affects your FICO score calculation. Your payment history will show whether you’ve made your payments to your credit accounts punctually. Delinquencies, late payments, bankruptcies, and collections can affect your credit score. To keep a positive payment history, you must be sure to pay the bills promptly even if it’s only the minimum amount.

Amounts Due (30 percent)

This measure, also referred to as credit utilization is the ratio of your balances on credit to credit limits. A high percentage of credit utilization can indicate that you’re overextended and could be unable in managing your debt. For a better credit score, you should keep your balances on credit cards low and avoid the habit of maxing out your credit card.

Credit History Length (15 percent)

The length of your credit history takes into account the age of your account with the oldest and the age of your most recent account as well as the overall average age of all your accounts. An extended credit history typically will result in an increase in your credit score because it shows that you’ve had more experience in managing credit. To keep a healthy credit history, don’t close old accounts even if you don’t ever use them, since it can reduce the credit history.

New Credit (10%)

The opening of multiple credit accounts in a brief period of time may suggest greater risk and negatively impact the credit score. If you are applying for credit an inquiry is reported to your credit report. This may affect your credit score temporarily. To limit the impact of credit cards make sure you only apply for credit when absolutely necessary, and refrain from opening more than one account in a short period of time.

Credit Mix (10 percent)

Having a variety of credit accounts (such as mortgages, credit cards as well as auto loans) can have a positive impact on your credit score. This is a sign that you can manage a variety of kinds of credit in a responsible manner. Although it’s not essential to have each kind of credit, having an assortment of credit can improve your score over time.

Factors that Do Not impact Your FICO Scores

There are other aspects which Fair Isaac Corporation says are not part of the formulas that calculate your FICO score. These are:

• Age
• Gender
• Salary
• Location

Lenders might consider your income, the type of job you hold or other external circumstances when the decision to approve your credit application. But, FICO does not take these factors into consideration when calculating your credit score.

How do I check my FICO score?

If you’re curious about the details of what you FICO score is, then look it up it prior to when you apply for a loan in order to feel secure. The easiest way to gain access to your FICO score is to purchase it. In contrast to consumer credit report, you’ll be required to purchase it either through a third-party provider or directly with Fair Isaac Corporation.

We suggest going directly to FICO to get an extensive overview of the different credit scores. If you decide to go through a third-party ensure that the credit score you’re buying is a genuine FICO score.

FICO Score vs. VantageScore

VantageScore is an online credit score developed by three credit bureaus (Experian, Equifax and TransUnion) to compete with FICO.

There are many similarities with the other, such as using the exact score range (300 to 800) and utilizing past data on payments to predict the possibility of defaults in the future. However there are some important differences, such as:

• antageScore is not weighing accounts for paid collection negatively. The most recent version of FICO is also lessens the effect of collections paid for. However, the latest version of FICO is not widely used as at the time of writing.
• VantageScore is a credit score that counts in your credit the amount of late mortgage payments heavily than other types of late payments.
• If you’re struck by natural disasters the VantageScore takes into account
• You’ve got just 14 days to review your options using VantageScore. If you have FICO, you may need up to 45 calendar days to locate the most suitable loan.

Since around 90% of lenders still using FICO, VantageScore isn’t a significant player as of yet. If you want to know the likelihood that a lender will accept the credit request, verify your FICO score. They are the ones that are most likely to be considered by any lender you select.

FICO Vs. TransRisk

TransRisk credit scores are offered by TransUnion exclusively specifically, through Credit Karma. The process by which the credit score is determined as well as the is involved in improving the credit scores aren’t well-known.

Apart from being readily accessible to consumers via the Credit Karma website There isn’t much value in the TransRisk score.

It’s not used by many lenders or creditors, thus having a credit score won’t be helpful to get approved. However it could help you monitor the overall improvement of your credit score over time, and it could be a valuable monitoring tool, even if it’s not anything else.

What’s a good FICO score?

The “good” FICO score can be a a moving target, because it is largely based upon your goals in life as well as the kind of credit you’re looking for. Are you looking to purchase a new house, use the highest limit of a credit card or get an individual loan? Each scenario has the specific FICO scores and requirements.

Although there’s no one-size-fits all solution however, we can offer some guidelines that can help you comprehend the FICO scores you’ll require for various kinds of credit:

• Mortgages： A score on FICO of a minimum of 640 is usually required to be qualified, but scores of 720 or greater could get you the best rates.
• Auto loans： While a score of 620 FICO might get you a standard rate, you’ll require 740 or more to get the best terms.
• Credit cards with low interest： to be eligible you must have at least a FICO score of 640. However scores of 720 or more will get you the highest rates.

Be aware that lenders could draw the FICO score of your from multiple credit bureaus and may use different versions of the FICO score when deciding on lending. Your personal financial history influences their decision-making.

In this regard, it’s a good idea to search for the most competitive rates, particularly in the event that your credit score is in the prime or super-prime range. Comparing rates can help you discover the most favorable terms that fit your particular situation.

How do I increase my FICO score?

However, if you’re FICO scores aren’t enough to be eligible for the rates you’re entitled to, there’s many ways to improve your score:

• Apply for secured credit cards： A secured credit card requires an initial cash deposit as collateral. The credit limit you are granted will usually be based on the amount you deposit. Make sure that the card issuer notifies you of your transactions to the credit bureaus.
• Get a credit-building loan： A credit-builder loan is a modest loan designed to aid in building credit. The lender keeps the amount of the loan in a savings account and you pay it back monthly until the loan has been fully repaid. When the loan is completely paid, you get the money and your timely payment is reported to credit bureaus.
• Authorized users： If a family member or a close friend has a good credit score and would like to include your name as an authorized user on their credit card This can improve your credit score. Be aware that both the main cardholder as well as the credit of the authorized user could be affected by one another’s financial actions, so be sure you use this method with caution.
• Reduce the balances on your credit cards：The presence of a large balance could indicate a high risk of default and reduce your credit scores across the board. Prioritize paying off debts with high interest like credit cards, in order to lower your credit utilization, and to save on interest.
• Pay your bills punctually and consistently： Pay your bills on time, set up an annual budget, reserve funds to cover emergencies and remain aware of the amount you use your credit for. Whatever your credit score, maintaining healthy financial habits is vital for a long-term health of your credit.
• Take negative credit reports off your credit report: Do you have insufficient payment that were actually made on time?  Multiple collections accounts for the same debt? Creditors listed as higher than what your records show? All of these mistakes on your credit reports. These errors that can hurt your credit score. Getting these errors removed can help you get credit earlier rather than later.

Don’t be discouraged if your credit scores that you’re getting aren’t exactly the identical to the ones you see at the bank or at the auto dealership. Be prepared to keep working on it and build your credit slowly over time.