Applying for a loan. Applying for a credit card. Setting up utilities (electric, gas, water, etc.) for where you live. These are some of the events where a company uses your FICO score to help determine how risky a customer you are. Your FICO Score won’t be the only factor a company uses in its assessment. A company may also check and verify your income, debt levels, recurring payments, payment history, past bankruptcies, and more. But your FICO score gives the potential lender a good snapshot when starting out the application process. In light of my last post on refinancing or buying a house, I’ll dig into what a FICO score is and how it affects any loans you get.
What is a FICO Score?
A FICO Score one of the types of credit scores. It is a number, between 300 and 850, that provides a snapshot of your credit history. It is the most widely used credit score. FICO stands for Fair Isaac Corporation, the company that created the FICO score. The higher the score the better. Five factors go into your FICO score. These are (1) amounts owed, (2) payment history, (3) length of credit history, (4) new credit, and (5) credit mix. The diagram below shows the amount each of these factors is weighted into your FICO Score.
Why are FICO Scores Important?
A FICO Score is a credit score, but FICO Scores are more important than the other credit scores because “FICO Scores are used by over 90% of top lenders when making lending decisions.” It doesn’t get much clearer than that. But take the following quote from an advertisement as an example:
“Toyota 0% APR and Low-APR Deals – Only very well-qualified buyers will qualify for the lowest APR.”
The key to that advertisement is ‘well-qualified buyers’. For the most part, a ‘well-qualified buyer’ in this instance would likely be someone with a good FICO score, probably 740 or higher, and who is well within the lender’s debt-to-income metrics. There will be other factors, but these will probably be huge drivers to be a ‘well-qualified buyer’. The debt-to-income will likely consider what your regular income is, how much total debt you have, the type of debt, and how much your monthly payments are on that debt. Below is a table of FICO Score Ranges and Ratings.
Although not nearly the only factor when getting a loan, your FICO score will go a long way in determining what it will cost you to borrow from a lender. In other words, your FICO score will be a major contributing factor to the interest rate you get on your loan.
Wrap-up
Since this was just a brief overview and FICO has a very informative website, it didn’t make sense to reinvent the wheel. Check out the myFICO website to learn more about your FICO score, how to improve your FICO score, and many other things regarding your FICO score.
One More Thing
When was the last time you checked your credit report? It is recommended to periodically check your credit report. Experian, Equifax, and TransUnion each allow for one free credit report per person annually. You can go to their websites to get your credit report.
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