What is FICO score? How is it calculated and why is it important?

FICO® scores, FICO scores or Fico credit scores are part of the criteria that many financial institutions use to make lending decisions. Understanding the ways you use credit and how it can affect your scores is essential to improving and maintaining good financial health.

The FICO score is a three-digit number based on information in your credit reports. 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 pay, and how much it will cost you (the interest rate).

When you apply for credit, lenders need a quick and consistent way to decide whether or not to lend you money. In most cases, they will look at your FICO score.

You can think of the FICO score as a summary of your credit report.. It measures how long you’ve had credit, how much credit you have, how much of your available credit is being used, and whether you’ve paid on time.

The FICO Score not only helps lenders make smarter, faster decisions about who they lend money to, but it also helps people like you get fair and quick access to credit when you need it. Because FICO scores are calculated based on your credit information, you have the potential to influence your score by paying your bills on time, not carrying too much debt, and making smart credit decisions.

Thirty years ago, Fair Isaac Corporation (FICO) debuted FICO Scores to provide an industry standard for creditworthiness scoring that was fair to lenders and consumers alike. Before the first FICO score, there were many different scores, all with different ways of being calculated (some even including gender and political affiliation).

How are FICO® Scores calculated?

Many people wonder what factors weigh more when determining the FICO score? Well, there are several factors that have different incidence and weight when it comes to determining whether a person has a high or low credit score.

Fair Isaac Corporation uses credit data reported to the three major consumer credit bureaus – Equifax, Experian and TransUnion – to calculate your scores. The information is divided into five categories, each of which represents an approximate percentage of your scores. And each one has a different “weight” when determining the FICO score:

Payment history (35%)

Amount of money you currently owe to creditors and the portion of available credit you are using (also known as credit utilization) (30%)

Length of your credit history (fifteen%)

How much new credit have you recently applied for? (10%)

Mix of credit accounts (10%)

But keep in mind that these are just guidelines. The importance of each of these factors varies depending on each person’s credit history..

While these are generally the criteria used to generate your credit scores, your scores aren’t the only information lenders evaluate when you apply for a loan or credit card. Lenders may ask you for additional information, including your salary, how long you have been at your current job, your occupation, and other information that can help them make an informed loan decision.

What is a good credit score?

You’ve probably heard that lenders consider consumers with higher credit scores to be less risky than those with lower scores. And generally, the higher your score, the more likely you are to be approved for a loan and qualify for lower interest rates. But do you know how high your FICO® Score needs to be to be considered good?

FICO defines five credit score ranges based on the FICO® 8 Score:

FICO® Score Range credit rating
579 and under Bad
580–669 Acceptable
670–739 Good
740–799 Very good
800+ Excellent

Other credit rating and scoring systems

In addition to the FICO score, there are other credit scoring systems. The most widely used today is VantageScore 3.0.

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