What to know about your FICO scores
Anyone who has applied for a credit card, auto loan, mortgage, or other type of financing has heard the term FICO score. Despite this, few fully understand what this credit score means or how it is determined. The following guide can help consumers better understand the country’s most widely recognized credit-scoring model.
The history of FICO
FICO stands for Fair Isaac Corporation, a predictive analytics company that was founded in 1956. The group began creating credit risk scores in 1981; these three-digit scores represent “the likelihood that you will pay all of your (debt) obligations on time for the foreseeable future,” said Barry Paperno, former consumer affairs manager for FICO.
How are FICO scores created?
FICO credit scores can range from 300 to 850, with some industry-specific scores going to 900. The scores are based on credit reports, or the statements generated by consumer credit reporting bureaus based on your credit activity and current debt.
FICO scores are broken down into five categories. Each category has a percentage value that indicates how much it affects the overall score.
- Payment history (35%): Your history of paying bills on time, late payments, or bankruptcies
- Amounts owed (30%): How much debt you carry, including credit card debt and installment loans such as student loans or mortgages.
- Credit history length (15%): The age of your accounts and how often they are used
- New credit (10%): How many recent inquiries have been made of your
- Credit mix (10%): The different accounts you have, such as banking, credit cards, or mortgages
Why are FICO scores important?
- Credit scores are used to assess how likely a person will be to repay their debt; for this reason, financial institutions heavily rely on credit scores when offering loans. Borrowers with high FICO scores can often secure better interest rates and other terms of the loan. FICO scores are also sometimes used by insurance providers, landlords, and other companies as a way to ascertain a person’s financial dependability.
- “If your scores are high, then you’re likely to get approved with competitive rates and terms,” said credit expert John Ulzheimer. “If your scores are low, then you could be denied or approved with less-advantageous terms.”
Why are there different FICO scores?
- While there are several dozen forms of FICO scores, they can generally be categorized into two groups: base FICO scores and industry-specific FICO scores. Base FICO scores are the most widely used. Industry-specific FICO scores are used for certain credit products, such as auto loans or credit cards.
- “Despite widespread use of the term ‘FICO score’ as a single score, FICO is actually the brand, with dozens of scores falling underneath that brand,” Ulzheimer said. This creates multiple editions of each scoring model; while lenders can choose which scoring model to use – leading to slight variations in FICO scores – the base criteria remains the same."