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What Is FICO Score & How Is It Calculated & Why is it important? (2020)

FICO score

Lenders always need to have a look at the FICO score when you apply for credit as it is consistent and a fast way to decide how reliable you are as an applicant. Let us review what is FICO score, how it is calculated and why is it so important.

Did you know? “Thirty years ago, the Fair Isaac Corporation (FICO) debuted FICO Scores to provide an industry-standard for scoring creditworthiness that was fair to both lenders and consumers. Before the first FICO Score, there were many different scores, all with different ways of being calculated.”

What Is FICO Score And Why Is It Important?

FICO score lends a hand to the creditors in deciding who they should give money to. These scores are calculated on the basis of your credit information. Therefore, you can improve it making payments on time, getting rid of pending debts etc.

In a layman language, we can say that,

“A FICO Score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you have to repay, and how much it will cost.” 

Do you need credit for educational purposes or may be to buy a new apartment? a good FICO score will always help you to gain access to such benefits. FICO score may also be checked by different insurance or utility companies when you are availing their services. A good FICO score will help you save money on interest and other extra fees. This is because lenders consider it a less risk to give money to those with good score and therefore they will offer lower rates.

“If your scores are high, then you’re likely to get approved with competitive rates and terms,” says Ulzheimer. “If your scores are low, then you could be denied or approved with less-advantageous terms.”

FICO Score Range

Although a “good” FICO score can vary from lender to lender, many have set up a general score range to help them make decisions. You can consider than as goals if you wish to improve your credit score overtime. Your FICO score will be instantly updated once any information on your credit report changes.

Here’s how different FICO score ranges have been classified:

FICO score ranges

Less that 580

Poor credit score

This is considered as a score less than average score of the US consumers. It also puts you at a risk of being considered a risky borrower.

580-669

Fair credit score

Although this is still regarded as a score less than the average score of the US consumers but mostly lenders do approve loans and credit card applications.

670-739

Good credit score

This score is considered slightly above the average score of US consumers. Most lenders find a good score suitable enough to approve loans.

740-799

Very good credit score

This score will set you as a very reliable borrower. It is considered to be above the average score of US consumers.

More than 800

Exceptionally good score

This is a clear demonstration to the lenders that you are a trustworthy borrower. It is hardly likely that you will be denied any loan application or credit.

How Is The Score Calculated

FICO score calculation takes in to account many different pieces of data given on your credit report. To get a quick summary, have a look:

Payment history (35%)

Payment history is, by far, the most important thing a lender will look at when determining your creditworthiness. They want to be sure you have made all the previous payments on time. A good history will reflect you as a reliable applicant. Therefore, it is one of the first things to consider when calculating FICO score. Make sure your account always has a healthy history.

Amounts owed (30%)

Owing money will not necessarily harm your overall score. It also does put you at a high risk of being an unreliable borrower. However, we recommend you never use too much of the available credit. This is because banks can view this as a hint of defaulting.

Credit history length (15%)

Generally, a lengthy credit history gives you better chances of scoring good on FICO range. However, this is not a hard and fast rule because many people who do not have a long credit history still have high FICO scores. This mostly depends on how good are your other factors on the credit report. Nonetheless, a reliable credit history can give you the extra push you need. This category will take in to account 3 things:

  • Ages of your oldest and newer accounts and an average of all the accounts you own.
  • Age of specific credit accounts.
  • For how long have you used certain accounts.

New credit (10%)

Contrary to popular belief, opening several different accounts will not help you improve FICO score. In fact, studies show that simultaneously opening many accounts can prove to be a blow to your score and portray you as a risky borrower, especially if you don’t have a long credit history to prove your worth otherwise.

Credit mix (10%)

Calculating FICO score can be a mix of different credit cards you use, retail accounts, loans, mortgage loans etc. Although you don’t need to have all of these, it is still better if your report shows a mix of few.

All of these categories are important in determining your credit score. The overall calculation will consider all the information, whether positive or negative, given on your credit report. Plus, scores for people who have a long credit history are calculated differently as compared to those with a shorter one.

How is FICO score calculated

Frequently Asked Questions About FICO Score

1. Is FICO score different than other credit scores?

Ans. FICO score is currently being used by more than 90% of the card lenders to make credit-based decisions. They are considered as a standard and accurate measure of creditworthiness. This does not mean that there are no other ways of measuring credit scores. They work a little different than FICO score and are used less by the lenders around the globe.

2. Are there different types of FICO scores?

Ans. FICO score have been continuously updated keeping in view the different factors that changes over 30 years. Currently, different types of scores have also been introduced. This is because lenders and credit card companies consider different aspects of this score to determine your creditworthiness. Therefore, more industry-specific scores have been created.

Did you know? “FICO creates three versions of its base FICO® scores to work with data from each of the major consumer credit bureaus: Equifax, TransUnion and Experian. The most recently released edition is FICO® Score 9, though some lenders may still be using FICO® Score 8 or an earlier version. FICO score 5 is one alternative to FICO score 8 that is still prevalent in auto lending, credit cards, and mortgages. ”

3. What is the highest achievable score?

Ans. The FICO score range, as shown above, can vary between 300 to 850. Here, 850 is considered to be the highest achievable score.

Wrap Up

Creditors and lenders make use of FICO score to evaluate you as a reliable customer. Therefore, it is of utmost importance to understand how the score is calculated and what factors affect it. This information can help you build a good credit and who knows, may be you will be able to score the best rates and lowest interests on loans and credit cards in future.

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