What Is a FICO Score, Exactly? A Thorough FICO Definition Here
You spend your entire life learning. From the time you’re born until you finish high school or beyond, that’s your primary job. News flash: it doesn’t end with graduation.
There is a lot to learn at every age about managing life as an independent adult, from home maintenance to personal finances. Whether you’re 18 or 81, one of the most important things to understand is the FICO definition.
You’ve heard the term “FICO score,” but how much do you really understand about it? Here’s what you need to know to look out for your financial future.
What Is a FICO Score?
A FICO score is a score that tells potential lenders and creditors that you’re financially trustworthy. The scores range from 300-850, and the higher your score is, the better.
FICO, or the Fair Isaac Corporation, gathers information from three credit bureaus: Equifax, Experian, and Transunion. Those credit bureaus have information from anyone you’ve done financial business with, including credit card companies, mortgage lenders, and more.
In truth, there are many types of FICO scores. FICO Score 8 is the number that is most common, so it’s the most important one to use.
The other FICO scores are geared toward specific industries and types of credit. For example, auto lenders tend to use FICO Auto Scores. Scores like these reflect how reliable you are for that particular type of loan.
Why Is a Good FICO Score Important?
No pressure, but your FICO score will impact more aspects of your life than you realize.
Any time you apply for new credit, the lender will look up your FICO score. That includes credit cards, student loans, auto loans, and especially mortgages.
If your score is low, you may not be approved for credit at all. If the lender approves you, they’ll give you a high interest rate because they see you as a high risk. That could cost you thousands of dollars over the course of the loan or credit account.
People will check your FICO score for many other moves in your life as well. Landlords check it when you apply for an apartment, and so do utility companies and insurance companies. Many employers even check your credit when you apply for a job.
This is why it’s so important to know and understand your FICO score. It will have an impact on almost every significant step you want to take in life. If you don’t know your score, you won’t know how to improve it and the low score will haunt you for decades.
What Factors Affect Your FICO Score?
Knowing how important that one number of your FICO score is, it’s natural to ask where the number comes from.
As we mentioned above, your FICO score is based on data from three credit bureaus. The score focuses on several key pieces of information from those credit bureaus.
One of the best things you can do for your credit score is to keep making payments on time. It’s especially harmful if you miss payments and a creditor sends your account to a collections agency.
Don’t panic every time you forget a payment and submit it two days late, though. Credit reports only look at payments that are 30 days late or more.
Amount of Debt
Debt has become common in the US, especially for people starting out in life. If you have too much debt, it will hurt your credit score.
Your FICO score looks at two numbers for measuring your amount of debt. It looks at the total amount of debt you have and your credit utilization ratio.
A credit utilization ratio is the percentage of your total “revolving” credit that you’re using. In other words, add up the credit limits for all your credit cards. Then add up all the balances on your credit cards. This shows you what percentage of your total revolving credit you’re using.
The lower your credit utilization ratio is, the better. At most, you want it to be 30% or lower.
Types of Credit
If you have a long and reliable history with credit cards, that’s great information for credit card companies. If you want a mortgage, though, the lender doesn’t see any evidence that you can handle a long-term, larger credit commitment.
For a high FICO score, you want to have a mixture of different types of accounts. It’s ideal to have a blend of revolving accounts like credit cards and installment loans like auto loans.
Credit History Length
Let’s say you have two friends and you need to decide which one you can trust with a secret. Neither Joe or Jason has ever betrayed your trust, but you’ve known Joe for ten years and Jason for one year. Who would you trust more?
Chances are that you’d trust Joe because he’s been trustworthy more times than Jason has.
Your potential creditors feel the same way. It means more to have ten years of consistent payments than one year. This is why it’s good advice for teens to get a credit card as soon as they turn 18.
When a person is searching for a lot of new credit, it makes creditors nervous that the person is taking on more than they can handle.
Your credit score accounts for this in the form of “hard inquiries.” Every time you apply for new credit like a credit card or a loan, it goes onto your credit report as a hard inquiry.
If you have more than two hard inquiries in a year, it starts to hurt your score.
While this isn’t as common as the other factors, certain legal situations will affect your credit score.
The important legal records are those that relate to money you owe. Filing for bankruptcy will have a huge impact on your credit. It can also hurt you if someone sues you for an unpaid debt and wins.
Understanding the FICO Definition
Having a handle on your credit score is one of the most important things you can do for your financial wellbeing. Now that you have a clear idea of the FICO definition, you can get to work boosting your credit score for a better future.
If you’re ready to take another step in your finances, explore our site to apply for a personal loan and more.