FICO Score: An In-Depth Insight Of Credit Ratings
A FICO score is a three-digit number that’s used by lenders to determine your ability to repay a loan. This rating dictates if you’re eligible for a loan, how much you can borrow, the rate of interest, and how much time you’ll get to repay.
Generally, a FICO score is the summary of your credit report. It reflects how long you’ve had accounts, the amount you’ve consumed, and if you’re making timely payments. Keep reading to learn what a good FICO score is and how to improve your overall rating.
Importance Of FICO Scores
Listed below are some of the main reasons these ratings are so crucial to your financial health and life.
- It helps people gain access to loans and other types of credits
- A good rating has the power to save you a lot of money in interest. Your lenders might lower the rates since a good FICO number means that lending you money will cause no risk for them
- These numbers can act as a quick and consistent way for lenders to assess the credibility of the borrower
- Predictive scores can aid in lowering the cost of credit for the whole population
- These ratings can make financing more accessible for the masses
How Do FICO Scores Differ From Other Credit Scores?
FICO scores are created by the Fair Isaac Corporation. This rating has a high reputation in making lending decisions, hence why it’s used by more than 90% of lenders.
These ratings define the industry standard in order to make fair and accurate decisions about a person’s creditworthiness. Therefore, this number stands apart from the other credit scores out there. You may have seen other ratings in the past. These numbers are calculated differently than the FICO numbers are. The credibility of FICO scores is far better than any of the different scoring standards out there.
What Is Considered As A Good FICO Score?
Every lender has a different way of defining individual rating requirements. Keep in mind that you can always improve a score. There are different number ranges determined by creditors to make lending decisions. Reviewing these ranges is important for knowing what a good rating is. Once you have this knowledge, determine what number you’d like to achieve before seeking financing.
Score | Rating | Description |
Less than 580 | Poor | This range falls very short compared to the average rating of most consumers. Hence, lenders will consider you a risky borrower |
580-669 | Fair | These numbers fall short compared to the average score of most consumers. However, most lenders might move forward with the loan |
670-739 | Good | This range is near or even above the average score of consumers and is considered a good rating by most lenders |
740-799 | Very Good | Your score is clearly above average consumers. Most lenders will consider you a dependable borrower |
800+ | Exceptional | Your rating is well above average. Most lenders will consider you an exceptional borrower |
How Is FICO Score Calculated?
Now that you discovered FICO scores and know what this rating is, let’s show you how it’s calculated. These scores are determined by making use of different credit data in your report. This data can be categorized as follows:
- Payment history
- Amounts owed
- Length of account history
- Account mix
- New credit
Let’s dig a little deeper into these factors:
- Payment history - This factor contributes to 35% of the score. It’s probably the first aspect that a lender would look into. A person's payment history helps any lender figure out the risk factors associated with that borrower. Make sure you pay your bills on time and maintain a clean history
- Amounts owed - If you have outstanding loan accounts and owe money, it’ll have an impact on your rating. It doesn’t mark you as a high-risk borrower, but it shows that you’re making a lot of use of your available credit. Some banks can imply that the possibilities of defaulting are greater in this case. This factor contributes to 30% of your score
- Length of credit history - If you have a more extended history, your ratings will increase. This factor can also co-depend on other elements of your report. This could include the duration of holding an account, the age of the oldest account you hold, and that of your newest one. This factor contributes to 15% of your score
- Credit mix - The bureaus will take your cards, installment loans, retail accounts, mortgage loans, and finance company accounts into consideration. This factor contributes to 10% of your rating
- New credit - If you open multiple accounts in a very short span, it implies more risk from the lender's perspective. This factor contributes to 10% of your overall rating
How To Improve Your FICO Score
The following points can be used in improving your FICO Score:
- Fix any errors or issues in your financial history (if any). Review your reports issued by all three bureaus and make sure the data is correct
- Don’t fall for any claims that promise to improve your rating quickly. This process takes patience and consistency
- Paying loan amounts on time to your creditors contributes to improving your score
- Negligent payment of bills and being unmindful of deadlines can affect your rating. Make sure you keep track of when payments are due
- If you’re confused about the report or think there’s a discrepancy, seek advice from a good credit counselor. These professionals will help you rebuild your rating
Bottom Line
FICO ratings play an important part in defining the amount of financing you’ll be allowed. Always work towards having good credit utilization and pay your loans on time. Make sure you don’t make drastic financial decisions that would leave a black mark on your report.
