What Is a FICO Score? How Is it Calculated?

There are two companies in U.S. that dominate the credit scoring industry. FICO is one of them. Lear more what’s FICO and how it affects you.

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When you apply for a loan or a line of credit, lenders will look at your FICO ® score. But what does this score actually mean, and how is it calculated? Let’s take a closer look.

What Is a FICO® score? 

FICO®, or Fair Isaac Corporation, is a credit rating company that draws information from credit rating bureaus, such as Experian®, Equifax®, and TransUnion®, to rate the likelihood that you’ll pay your bills. FICO® gives each borrower a rating, or a FICO® score, which is a three-digit number, ranging from 300 to 850. The higher your score, the more likely you’ll repay your debts. FICO® puts scores into five categories:

When your score is above 670, lenders are usually more confident you’ll pay them back. However, if your FICO® score falls into the “Fair” range, you’re considered a subprime borrower, meaning you’re a higher risk in the eyes of most lenders. If your score falls even more into the “Very Poor” range, you could pay additional fees when applying for loans, put down higher security deposits for utilities and rent, or even face rejections on loan and credit applications. 

Why does your FICO® score matter? 

Lenders, banks, insurance companies, landlords, utility and cell phone companies, even some employers look at your FICO® score to gather a first impression of your dependability. Here are some ways in which your FICO® score can impact your financial life. 

1. It can determine securing a credit line

This includes a mortgage, student loan, or even an apartment. Your FICO® score is often the first thing a lender checks to assess the risk in lending you money. A high score means you’ll rarely hear, “no,” whereas a low score can limit who lends you money or how much you can borrow. 

2. It can help set your APR or interest rates

If you have a high FICO® score, expect better loan rates and terms. You’re less risky to a lender, meaning they’ll likely lower the APR or interest rate on your loans. Conversely, a lower FICO® score means you may have a hard time getting approved, or you may have to settle with a higher APR. 

3. A high FICO® score can lead to great deals

 Sometimes, when your FICO® score is very good or exceptional, you’ll get better deals on insurance premiums, as well as superior rewards from credit card companies. 

What affects your FICO® score? 

While FICO® isn’t completely transparent about their scoring methodology, they typically base scores on five criteria, which are: 

1. Payment history (35%) 

Do you pay your bills on time? Have you had numerous late payments? FICO® analyzes your past behavior to see if you’re punctual with payments or if you have a pattern of missing them. 

2. Amounts owned (30%)

How much of your available credit are you currently using? How much debt do you have? If you’ve already used most of your credit, you’re probably overextending your income, meaning you’re less likely to make payments on time.  

3. Length of credit history (15%)

How old are your credit accounts? How long have you been borrowing money? In general, the older your accounts, the higher the score on your credit history.  

4. Credit mix (10%)

How many different types of credit do you have? Basically, FICO® wants to know how you handle different accounts, such as credit cards, mortgages, lines of credit, car loans, and personal loans. If you have several types of credit, and you repay them all on time, you’ll see a higher score in this category. 

5. New credit (10%) 

When was the last time you opened a credit account? Opening several accounts at once could mean you’re at risk of default, which can nick your score. 

How do you access your FICO® score? 

First, check with your credit card company or bank, as many companies give free FICO® scores monthly. If your card company or bank doesn’t offer this, or you don’t haveone, you can use Discover’s free credit Scorecard, which they offer to everyone, cardholder or not. 

Do you need a good FICO® score to get a line of credit? 

If you have a bad FICO® score, it can be difficult getting a line of credit. But that doesn’t mean you can’t ever secure one—there are lenders, like Echo Credit, who analyze a variety of factors, not just FICO® scores, when reviewing your application. 

The truth is—life happens to those with good credit and bad credit. Despite your FICO® score, you should have access to fast cash, as long as you can pay it back. If you’re looking to open a line of credit, apply to Echo Credit, and we’ll be happy to get your application moving. 

Do you know more about what makes up your credit score click here.

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