Intro – What is a FICO Score?


Today, there are many credit scoring models in circulation, but the most widely used ones are the FICO scores.

In this article, you will learn the answers to the following FICO score definition questions, “What is a FICO score?” and “What does FICO stand for?” as well as all the relevant information regarding the FICO credit model.

But first, let’s quickly go over the basic concepts of a credit score.


What Exactly Is a Credit Score?

what is a fico score

Image source: Bigstock

A credit score is a mathematically calculated number that represents the trustworthiness or, better said, the creditworthiness of an individual.

This number is used by lenders, such as credit card companies and banks, every time someone applies for a loan.

Credit scores have become the easiest tool for lenders to evaluate the risk involved in lending assets or money to people who ask for them.



What Does FICO Stand for?

The FICO score definition comes from the name of the company that created this credit scoring model, which is Fair Isaac Company. The corporation was founded in 1956 by mathematician Earl Isaac and engineer William Fair, who sold their first credit scoring system two years after the company’s debut.

Three decades later (1986), the company went public and, in 1989, began to spread its general-purpose FICO credit scores. Since then, the corporation has expanded up to the point where it is now. Currently, 90% of the top lenders in the US use FICO scores when deciding whether a person is eligible for a loan or not.

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What Is a FICO Score?

So, what is a FICO score?

The simple FICO score definition would be: a specific type of credit score with a purpose of evaluating whether a person is likely to pay back a loan on time without causing the lender any sort of trouble during the process.

FICO scores do not only benefit the lenders but also the consumers. If someone presents a good credit score, that individual is more likely to receive more benefits, such as a bigger loan and a better interest rate.

What is FICO, and who created it?

Although the very first FICO scores were developed and devised by Fair Isaac Company, they soon became an important component of all of the three major credit reporting bureaus: Experian, TransUnion, and Equifax.

These companies compete with each other and will do everything they can in order to attract consumers to their side.



How Many Types of FICO Scores Are There?

People usually wonder, “What is my FICO score?” Although this question comes up very frequently, it’s not the right question!

Why?

Because a US citizen doesn’t only have one score but at least 16 FICO credit score reports.

Let’s explain further.

The original FICO scores were used to help credit bureaus and lenders calculate the upcoming risk of someone not being able to pay a mortgage. That was it. Many things have changed since then, and FICO now features more than just mortgage risk. In fact, the FICO model now applies to 6 specific credit scores. Let’s take a look at the different FICO scores:

  • Generic FICO Score: the base and the most fundamental FICO score used to predict the potential risk when a lender offers a loan
  • FICO Mortgage Score: helps lenders evaluate risk and create an accurate image of the consumer’s risk profile before closing a mortgage deal
  • FICO Auto Scores: industry-specific scores that are meant to refine the prediction of future auto loan payment risk
  • FICO Bankcard Score: again, a better refined version of the base score meant to weigh the credit card history of a customer
  • FICO Installment Loan Score: loans where you make consistent, regular payments (such as mortgage and car loans)
  • FICO Personal Finance Score: savings, retirement, etc.

There are lots of misconceptions regarding this topic. When people ask, “What is my FICO score and how is it calculated?” you need to know this: the three major credit bureaus use all kinds of variations and, over time, have created quite a few evaluation criteria.

If you are looking for a detailed explanation of the different types of FICO scores, you should check out this article.

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How Is the FICO Score Calculated?

Even though the exact mathematical formulas are not available to the public, FICO has disclosed five main components that will answer our question, “What is a good FICO score?” Let’s examine each of these criteria, starting with the most important ones and moving down to the less significant ones:

  1. Payment History (35%): This is basically the most important factor that every lender examines first. It’s regarding whether you’ve paid or not paid your past credit amounts on time.
  2. Amounts Owed (30%): It refers to the amount of credit you owe presently. If you tend to use all of your available credit, it can indicate irresponsibility and that you’re more likely to miss payments.
  3. Length of Credit History: More factors influence this metric. The most important factors include the average age of all your credit accounts as well as how long different types of credit accounts have been established.
  4. New Credit (10%): This refers to the amount of new accounts you request to be opened. Rapidly opening several credit accounts in the same time period can minimize your FICO score.
  5. Credit Mix (10%): Your score can be boosted if your loans have a certain degree of variety. Handling more type of loans makes you more trustable.

These metrics are universal, but each of the credit report bureaus will modify the evaluation process and personalize it according to their policies. So, if you’re wondering, “What is my FICO score?” you won’t get a single answer…there are multiple answers!

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What Is a Good FICO Score?

After people ask “What is a FICO credit score?” the next question is usually, “What is a GOOD FICO score?” The evaluation process explained above provides the necessary criteria for a good FICO score.

whats a good fico scoreImage source: Bigstock

Base FICO scores range from 300 to 850. The better the score, the better the chance you’ll close a profitable deal with a lender. However, if your FICO score is low, you won’t have an easy time finding companies that will be willing to work with you.

Keep in mind that what appears to be a “good credit” may or may not be good for certain lenders. Also, lenders have their own ways of evaluating whether you are eligible or not. They will mostly use FICO metrics, but they won’t hesitate to take a look at your entire credit report. If you are wondering, What is a good FICO score?” here’s an example.

Let’s say your score is 630. A mortgage lender might go ahead, regardless of the risk, and offer you a deal, but when you hear the terms (interest rate, etc.), you won’t get a pleasant feeling. This is their way of assuring that people with lower FICO scores won’t become “bad business” for them in the near future.

In order to get the best mortgage rates, you’ll have to strive to reach a higher score, such as 750+. If you’re in that realm, you won’t have to deal with big interest rates; therefore, the deal you make is going to be satisfying, and lenders won’t have a problem working with you.



How to Improve Your Credit Score

Now that we’ve established what a good FICO score is, let’s take a look at how we can improve our score. Working towards increasing your FICO score is just like trying to lose weight. The process is not easy, takes time, and the end results create a better and more satisfying life for you. There is no quick fix and no magic formula that will improve your credit score overnight; you have to work for it!

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Here are some useful tips for improving your overall three-digit FICO score:

  • Pay Your Bills on Time

This is common sense. It is the main concept to having a good FICO score. Every time you’re late with your payments, your credit score slightly drops. Of course, nobody is perfect, and sometimes you just won’t be able to pay because of some well-established reasons.

If you have missed payments, it’s not the right time to “take your time” and think, “Well, I’ll do it later when I can.” The faster you pay your previous bills, the less your FICO score will be damaged. The next time you’re thinking, “What is a good FICO score?” link it to your commitment to pay bills on time!

  • Manage Your Accounts Responsibly

Try to keep your balances low. Having high balances and also a revolving credit will significantly lower your FICO credit score. If you find yourself in this situation, a good tip would be to increase your monthly payments up until your balances go below 30% of your credit limits.

Another thing would be to efficiently manage your credit cards. Having a few credit cards is actually positive, but don’t cross the line. You shouldn’t open credit cards that you don’t need, and you’re better off closing the ones that you no longer use.

  • Check Your Own Credit Report

It’s okay to check your credit report as long as you request it directly from a credit reporting company or from any other agency that is authorized to provide consumers with this information report. In fact, you are entitled by law to check your credit score through each credit report bureau every twelve months. You can do this for free using AnnualCreditReport.com



A Few More Things You Need to Know

  • Your FICO Scores Always Change

FICO scores are solely calculated according to your whole credit score report. Every time the report changes (and it does, every month), your FICO score also changes. If you miss a payment, expect your FICO to be immediately adjusted over the next month. This can be good and bad…it is up to you whether you improve your score or lower it.

  • There ARE Minimum Requirements for a FICO Score

In order to actually be eligible for a FICO score, your credit report must contain some things. First, you need at least one account opened for 6 months or more. Second, you need to have at least 1 account that has been reported to a credit agency, also within the past 6 months. Third, there should be no indication of a deceased person on your credit report – this shouldn’t be the case if you’re the only one using the account.

  • Credit Reporting Agencies Give a Minimum of 5 Reasons for Your FICO Score

Every time you FICO score is being calculated, the credit report bureau has to provide you with at least five reasons that mostly influence that specific score. Don’t expect positive reasons as they’re almost always meant to explain why your score hasn’t reached a higher level.

  • FICO Scores Influence More Than Just Mortgages and Loans

Beyond the primary use of this branded credit score, which is the evaluation of your creditworthiness, it can also influence other aspects of your daily life. For example, nowadays, more and more employers check applicants’ credit reports, and FICO metrics are the first thing they will look at. After all, it makes sense: if your credit report looks good, you’re a responsible person, and that’s a big plus.

More than that, insurance is greatly influenced by the credit score you’re presenting. FICO scores are often used to adjust the interest rates an insurance company will be willing to negotiate. When you want to rent an apartment, again, you stumble upon FICO…it gives landlords and rental companies a quick and reliable way to figure out whether you’re a trustworthy person.

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Conclusion

We hope that this article has covered most of the answers regarding a very common question nowadays: What is a FICO score? Overall, your whole financial life is greatly influenced by this three-digit number, and the more you “take care” of it, the more benefits you will reap from it.

AdvisoryHQ Team



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