If you’ve ever applied for a loan or credit card, you may have heard the term “FICO score” thrown around. But what exactly is a FICO score, and why is it important?
In this blog post, we’ll take a closer look at FICO scores, including what they are, how they’re calculated, and why they matter.
What is a FICO score?
A FICO score is a credit score developed by the Fair Isaac Corporation (hence the name “FICO”). It’s used by lenders to assess an individual’s creditworthiness and to determine whether they’re likely to repay a loan or credit card debt.
FICO scores range from 300 to 850, with higher scores indicating better creditworthiness. In general, a score of 700 or above is considered good, while a score of 800 or above is considered excellent.
How is a FICO score calculated?
FICO scores are calculated based on information in your credit report, which includes things like your payment history, the amount of debt you have, and the length of your credit history.
Here are the five key factors that go into calculating your FICO score:
- Payment history (35%): This is the most important factor in your FICO score. It looks at whether you’ve paid your bills on time, how many payments you’ve missed, and how long you’ve gone without making a payment.
- Amounts owed (30%): This factor looks at how much debt you have, including things like credit card balances, personal loans, and mortgages.
- Length of credit history (15%): This factor considers how long you’ve been using credit. Generally, the longer your credit history, the better your score.
- Credit mix (10%): This factor looks at the different types of credit you have, including credit cards, car loans, and mortgages.
- New credit (10%): This factor looks at how often you’ve applied for new credit. Too many applications in a short period of time can lower your score.
Why does your FICO score matter?
Your FICO score matters because it’s the primary way lenders determine whether you’re a good candidate for a loan or credit card. A higher score indicates that you’re more likely to repay your debts on time, which makes you a lower risk for lenders.
Having a good FICO score can also save you money in the long run. Lenders often offer lower interest rates and better terms to borrowers with higher scores, which can result in significant savings over time.
In addition to affecting your ability to get credit, your FICO score can also impact other areas of your life. For example, landlords may check your score before renting to you, and employers may check your score before offering you a job.
How can you improve your FICO score?
If you have a low FICO score or want to improve your score, there are several things you can do:
- Make all of your payments on time: This is the most important thing you can do to improve your score. Set up automatic payments or reminders to help ensure you don’t miss a payment.
- Pay down your debts: Lowering your debt-to-income ratio can improve your FICO score. Try to pay off your balances as much as possible, starting with the accounts with the highest interest rates.
- Check your credit report for errors: Your FICO score is based on the information in your credit report, so it’s important to make sure the information is accurate. Check your report regularly for errors and dispute any inaccuracies.
- Avoid opening new accounts: Too many new credit applications in a short period of time can lower your FICO score. Only apply for new credit when you really need it.
- Keep old account
