What Is A FICO Score?
The primary avenue by which lenders make their money is charging interest on loans. A lender decides how much interest to charge by reviewing an applicant's credit score. This number is typically a reliable representation of creditworthiness.
Although there are several different credit score sources, over 80% of lenders use an applicant's FICO credit score, making it by far the most important.
This score is a three-digit number ranging from 300 to 850. It’s a direct reflection of an individual's credit standing. There are different versions of this scoring system. For instance, FICO score 2 is the most widely used rating when applying for mortgages.
How Is A FICO Score Determined
The exact algorithm that’s used to determine the total score isn’t public knowledge. However, we do know which factors are used to determine it and how much they’re weighed against one another. Knowing these factors allows an individual to have a fairly good idea of how their FICO credit report is calculated. Therefore, having this information can help you avoid any surprises when checking your report.
- Payment history - 35%: Lenders are most interested in how reliable a borrower is with making their payments. Because of this, payment history is the single largest factor when it comes to determining one’s FICO number. It’s important to know that just a few missed payments can have a fairly dramatic impact on one’s score. Always make at least the minimum payment on time
- Debt load/credit utilization ratio - 30%: The second single biggest factor is the total debt load. Lenders view borrowers who owe large sums of money as a higher level of risk compared to those who carry a low debt balance
Lenders also look at a person's utilization ratio, which is a measurement of how much of their available credit they have used. Those who have utilization ratios above 35% are typically seen as a higher risk since it may indicate that they have poor debt management skills
- Length of credit history - 15%: Those who carry established credit accounts for long periods are viewed as better applicants than individuals who don’t. If one has several accounts that they have been able to maintain in good standing for multiple years, then it can be assumed that they have exercised some degree of financial responsibility with their arrears
- Types of credit accounts - 10%: Borrowers who carry a diverse mix of arrears are seen as less risky than those who carry solely high-interest unsecured debt such as credit cards and personal loans
- Recently opened accounts - 10%: Having several old, well-established accounts on one’s report will improve a person's financial standing. Moreover, having several newly opened accounts or hard inquiries on one’s report will damage this
The reasoning behind this is straightforward. If a lender sees that an applicant has recently opened several new accounts, it may indicate that they’re in some kind of financial distress
How Are Scores Ranked
As previously mentioned, FICO scores are graded within a range of 300 and 850. 800 and above indicates a perfect financial standing. Below is a generalized outline of how these numbers are typically viewed.
- Exceptional 800 - 850: Securing new loans should be of little trouble for individuals at this level
- Very Good 740 - 799: Applicants can expect to be approved and receive low-interest rates from the majority of lenders
- Good 670 - 739: According to research, only 8% of individuals in this range are likely to become delinquent on their debt payment obligations. This is also the most common FICO standing
- Fair 580 - 669: Approval rates are lower and interest rates are higher at this range. Most lenders view individuals within the fair range as subprime borrowers
- Poor 300-579: Most applicants within this bracket will be required to secure a loan with a deposit or asset to gain approval
How To Check A FICO Score
Many people may find themselves asking “how can I check my FICO score?”, or “how can I discover my FICO score?” Many card companies offer free soft checks through their mobile applications. For those that don’t, any of the three major bureaus (Experian, TransUnion, and Equifax) can provide individuals with a full report.
The Bottom Line
A FICO number is the primary factor a lender uses to determine who gets approved for a loan and who doesn’t. Because of this, one’s credit standing is their lifeline to accessing financing. Therefore, it should be maintained to the best of one’s ability.
