Trying to fully understand your credit landscape can be a difficult process filled with financial lingo and terms that most everyday people do not encounter or deal with. If you have ever applied for a loan or credit card, you may have seen or heard that your eligibility for financing was dependent on your FICO score. While you may have some familiarity with when a FICO score is used, having a greater understanding of its role and how it is calculated can help you take better charge of your finances and credit now and in the future.

What is a FICO Score?

Think of your FICO score as your rating or ranking that helps companies, banks, and other lenders determine whether you present a high or low risk when it comes to paying any number of financial obligations. The term FICO comes from the creator of the method of calculating creditworthiness. The Fair Isaac Corporation created the FICO score as a way to give those in the financial industry a reliable standard that could be used uniformly to calculate the creditworthiness of an individual.

The FICO score is considered the most popular, fair, and accurate way to determine an individual’s credit rating. While there are a number of other different methods or credit scores, FICO is one of the most trusted and reliable and is used by 90% of the top lenders in the United States.

It is important to be aware that there are other credit scores available to consumers. These other credit scores may not provide an accurate picture of your current creditworthiness as seen by most lenders and in most cases are not used by the most reputable lenders in the financing industry.  When looking up your credit score, it is crucial to make sure you are requesting a FICO-based score. This will allow you to review the most accurate representation of your current credit situation and what lenders see when they are pulling a FICO score on your behalf.

How is a FICO Score Calculated?

Your credit score is calculated based on the information that is found within your various credit reports. FICO uses the data found in your individual credit reports provided by the three credit bureaus of Equifax, TransUnion, and Experian. This is one of the reasons it is in your best interest to periodically check each of your credit reports to ensure they are accurate and up to date.

Using the data collected from your credit bureaus, your FICO score is calculated based on five distinct categories of information. Each category holds a different weight and importance in the calculation of your individual FICO credit score. Only the information found within your credit report both negative and positive is used in the calculation of your score. No outside information is gathered or sought to come up with your FICO score.

The five categories of information compiled and evaluated to calculate your FICO score include:

  • Payment History — This element of your credit history holds the most weight at 35% of your credit score. This provides valuable insight to lenders on your payment habits and the likelihood they will be paid in a timely manner.
  • Amounts Owed — This portion of your report is 30% of your FICO score calculation and considers the amount you owe in comparison to your available credit.
  • Length of Credit History — 15% of your credit score calculation will be based on how long you have established credit with lenders and the use of your accounts.
  • New Credit — How many new accounts have been opened or inquired for is used as a portion (10%) of your credit score calculation.
  • Credit Mix  — 10% of your FICO score calculation will be based on the variety of different accounts that are part of your credit history such as retail, credit cards, and other types of loans.

Are There Different FICO scores?

Within the realm of FICO scores, there is actually a wide range of different FICO scores available and used in different industries. These variations of FICO scores still use a similar basis of information such as that described above in calculating your score but take into account more specific attributes relevant to the loan or financing being sought such as for a home, car, or retail credit card.

It is also important to note that there are a number of different FICO scores. In addition to the industry-specific scores mentioned above, each credit bureau has a slightly different FICO score calculation. This is due to the fact that not all lenders report to all the credit bureaus. One individual creditor can have very different versions of their credit report depending on the information found within Equifax, Experian, or TransUnion. 

What is Considered a Good FICO Score?

The FICO score range is from the lowest possible score of 300 to the highest score at 850. In general, a score above 650 is viewed favorably and considered a representation of good credit history. Any scores above 740 are considered a very good rating and anything above 800 is an exceptional rating.

In contrast, a score falling below the 650 mark begin to represent a higher risk to lenders and anything below 580 is considered a poor rating and unlikely to obtain credit with most lenders.

Why Should I Be Concerned with My FICO Score?

Many consumers view their FICO score as a number that needs to be improved, but they may not understand the reasons why. The higher your FICO score the lower risk you become to a potential lender. This, in turn, will lead you to not only more availability to credit and purchasing power but ultimately will save you a significant amount of money.

Who Uses FICO Scores?

FICO scores are used in a variety of sectors and industries to determine the risk of taking you on as a customer, client, or creditor. While lenders are definitely the primary users of a FICO score there are a number of other companies or individuals that are using this score to determine your future business or standing with them.

  • Banks and Lenders for mortgages, loans, credit cards
  • Utility companies such as mobile phone services and electricity providers
  • Insurance companies to determine policy rates

How Can Your FICO Score Impact Your Life?

Your FICO score will not only determine the financial opportunities available to you for financing your home, a car, or your education, it will also determine the amount of interest you will be charged for obtaining these loans. The higher your credit score is the more appealing you become to lenders. This encourages lenders to provide you with competitive interest rates and financing offers that will ultimately lead you to save considerable amounts of money over the lifetime of your loans.

If you are dealing with mounting credit card debt and are looking for a solution to take charge of your finances and improve your credit score, contact our team at Debt Blue for a free debt relief quote. We can help you decide if a debt settlement program can help you get your finances on track and on the path to a more secure and successful financial future.