By Kyle Walker | June 1, 2019
A FICO® score is a number used by lenders, banks, insurance companies, and others to gauge your credit worthiness. This number generally ranges from 300 to 850 and is derived from the information on your credit reports.
Many people think there is only one FICO score, but actually there are several. You have a FICO score for each credit report, and these scores can vary if the information on your credit reports differ from each other. For example, if you have an installment loan from a bank that only reports to Experian and TransUnion and not Equifax, then your score derived from your Equifax report will be different than your scores derived from your Experian and TransUnion reports.
But that's not all. There are also different versions of the FICO score, which are industry-specific. If you're applying for a new credit card, lenders will often use your FICO Bankcard score. If you're applying for a car loan, lenders will often use your FICO Auto score. For a complete list of FICO scores currently used today, please go here.
Who is FICO?
FICO is a corporation, and stands for Fair Issac Corporation. They are a data analytics company based out of California and have been providing lenders with credit scores for decades.
Why are FICO scores important?
To put it simply, because most lenders and insurance companies use them. A high score can lead to lower insurance premiums and interest rates. Conversely, a low score can lead to more expensive premiums and rates or a denial of credit entirely. Credit score consciousness can benefit you greatly.
Knowledge is power. And knowing your FICO score can help you determine the likelihood that your application will get approved. You can often contact lenders directly and ask them if they require a minimum score. Some will share this information, some won't. If your score is low, you may not want to waste your time applying and risk a hard credit inquiry for nothing.
What makes up a FICO score?
The FICO score is broken down into five categories:
Payment History (35%) - This is by far the most important. Lenders are more likely to extend credit to people who pay their bills on time, and having a strong payment history is the best way prove your credit worthiness.
Credit Utilization (30%) - Credit utilization, or your balances versus your limits, is also huge. A piece of advice you often hear is, "Keep your balances low," and this is true. If you have a credit card with a balance of $100 and an available limit of $900, your credit utilization is 10%. Keeping this number low is a sign you do not overextend yourself.
Length of Credit History (15%) - Length of credit history includes the average age of all your accounts, your longest account and your shortest account. The longer the accounts in good standing, the better.
New Credit (10%) - Recent credit inquiries and newly-opened accounts contribute to your score as well. It's important to keep inquiries as low as possible. Too many inquiries can result in a denial of credit.
Credit Mix (10%) - A credit mix would be credit cards, installment loans, mortgages, et cetera. Having a diverse credit background plays a role in your score.
Lenders, insurance companies and others use your FICO® score to make informed decisions when extending credit and other services. Knowledge is power, and understanding the FICO scoring model and how it's used can help you build and maintain good credit, which can make life much easier and save you money in the future.