If the term “FICO score” sounds like it’s another language, or you’ve been avoiding checking your credit score to remain blissfully ignorant, it’s time to learn the FICO basics. Your FICO score plays a big part in what interest rates you can get approved for if you’re interested in debt consolidation loans, or your ability to get approved for a mortgage. Keep reading to learn more about FICO scores and why they’re important.
A FICO credit score is a score that helps lenders predict consumer behavior. Your FICO score utilizes predictive analytics to look at a variety of factors that help determine the likelihood that you’ll be able to pay their bills on time or use a credit line responsibly. Note that there isn’t just a single FICO score. The company has dozens of credit score models that they use. These scores range across different loan products and clients.
FICO stands for the Fair Isaac Corporation. It was the company’s original name before it was shortened to FICO.
FICO scores range from 300 to 850. The higher the score, the less risk the borrower represents to the lender. FICO considers a good score to be anything from 670 to 739, with anything higher being deemed “excellent.”
There are 5 main factors that make up your FICO score:
Payment history is the biggest factor of your credit score. Showing that you’re able to pay debts consistently and on time helps indicate to creditors that you’re responsible.
Your credit utilization ratio is the total amount of credit you have available compared to the amount of credit that you’re using. You ideally want this ratio to be below 30%.
The longer you have open credit accounts, the better. This shows creditors that you’re a responsible borrower. Older accounts show a longer credit history, so don’t rush to close an account once you’ve paid it off in full.
Having a variety of credit shows that you’re responsible with different types of accounts, such as car loans or credit cards.
Opening several new accounts in a short period of time can be a red flag to creditors. Keep new credit inquiries at a minimum to preserve your score.
You’re eligible to receive a free copy of your credit report from each of the three main credit reporting bureaus (Experian, Equifax, TransUnion) each year at www.annualcreditreport.com. You can request your FICO score from each agency. You can also request your score directly from www.myFICO.com, which is the consumer division of Fair Isaac Corporation. Note that this request is not free.
The higher your FICO score, the better the loan terms and interest rates you’ll likely qualify for. Your FICO score can also be a factor in getting approved by a landlord or getting hired for a job. Your FICO score plays a big part in your financial life, so the more you can raise it, the better.
There you have it—a quick FICO 101 lesson. By knowing your score and being able to boost it if necessary, you can set yourself up for a better financial tomorrow. Spend responsibly and good luck.
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