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FICO Score: Understanding Its Importance and Impact

FICO Score

Have you ever heard of FICO and wondered what is a FICO Score? A Fico score is your credit score established by the Fair Isaac Corporation. Usually, lenders use the borrower’s FICO score and other financial details to evaluate the borrower's credit report to check the eligibility of the applicant whether they will repay the debt on time, or whether they extend credit. 

FICO scores are a brand to measure your credit scores. Also, FICO will take your account data in 5 different sectors to check credit worthy of the borrower. The areas looked after by FICO include - payment history, current levels of indebtedness, credit history length, new credit accounts of borrowers, and types of credits used so far. 

Maximize your chances to qualify for varied loans with excellent credit scores. In this blog, we will walk you through different factors to answer your concerns like what is a FICO Score? How to get FICO Score? And more. 

What is the FICO score?

We are sure you must be aware of credit scores, but probably most individuals are confused about what is FICO score. It is a three-digit number, often ranging between 300-850, that helps lenders understand how likely the borrower is to repay the debt based on credit history. 

Additionally, FICO also refers to the industry-specific scores for credit cards, car loans ranging from 250 to 900, and FICO was established in 1989. Often FICO scores and credit scores are used interchangeably, but other brands used for calculating scores like Vantage Score 

Key factors to understand about FICO Score

  • FICO score is one of the methods to calculate a borrower’s creditworthiness for a debt application. 
  • Ideal FICO score ranges around 300-850 by lenders to check your credit history and ability to repay debts with interest. However, a FICO score that ranges around 690-719 is considered a good score. 
  • FICO scores help lenders determine what kind of financial product, services, and even interest rates you qualify for. The better or higher the FICO score you have, you will tend to acquire better terms. 
  • FICO scores are utilized in 90% of mortgage application procedure decisions in the United States of America. 

How Does the FICO Score Work?

FICO is an analytic software company that is dedicated to offering products and services to businesses and customers. The company is known for providing the best and most reliable customer credit scores that apply to financial institutions for decking whether to lend money or issue credit to borrowers. 

FICO score is utilized in the majority of credit decisions made by varied financial institutions and professionals in the USA. Individuals can explain negative items in their credit reports, in most cases financial institutions will deny loans to individuals who have lower FICO scores. 

Importance of FICO Score

As we mentioned above, often lenders rely on the FICO score to decide on the eligibility of granting funds for debt to individuals. FICO scores give clarity on how borrowers handled their credit over the years. Along with the credit score, your lenders will look for additional details like your current income and debt obligations with other institutions, to check whether you hold any means to repay their debt with determined interest rates. 

What is a FICO score? Why should I be concerned about my credit score? This is one of the common questions individuals have. It is important to have a decent or good FICO score because the better score you possess, the better chance you get to acquire terms and interest rates for loans. For instance, when an individual has a good or excellent score range, it can give them access to more debt choices and select lower interest rates. 

Additionally, your credit or FICO scores may be utilized by utility companies for landlords to understand your deposit or to decide whether you can qualify for becoming a tenant. 

Vantage vs FICO Score

As we discussed, just like the FICO score, often a few institutions utilize the Vantage score to check the credit worth of an individual. Sounds confusing? Don’t worry, we will discuss more vantage vs FICO scores in detail. 

Vantage score was introduced jointly by 3 main credit bureaus in 2006. FICO is well known, and commonly used by customers and lenders across the USA. However, the Vantage score is gradually gaining attention among lenders and customers as well. 

FICO states that they have been used in almost 90% of credit decisions. It is preferred by the law in one crucial sector - home mortgages. For now, the FICO score is the only tool used for evaluating credit risk approved by government-sponsored enterprises like Fannie Mae and Freddie Mac. 

In 2022, the Federal Housing Finance Agency finally approved the usage of Vantage Score for 4.0 for loans and FICO 10T which was sold to Fannie Mae and Freddie Mac. Though implementing both scoring methods will take a multiyear effort to coordinate. However, the benefits of vantage vs FICO score are expected to be significant, specifically for minority home buyers. 

How to Get a FICO Score?

While the importance of credit score arises for every debt-seeking applicant, the next question that arises in everyone’s mind is how to get FICO score. Don’t worry we’ve got you covered!!

You may have not realized this yet, but you may already have access to the FICO score on your credit card statement on a banking app. A few credit card issuers like Banking of America and Discover provide customers with a free Fico score monthly. 

You can opt to pay to access the FICO score through the company's website. It will cost you around $29.95 per month to receive your credit scores via all 3 credit bureaus - Experian, Equifax, and TransUnion, and get other information like FICO automotive score. If you are planning for bigger purchases like car loans or home payments then it can be worth paying for one month to check your reports and then you can cancel the plan. This will prepare you with the right credit score details.

Various personal finance websites offer you a free credit score from VantageScore, which is the main competitor of FICO. This will allow you to access another option for monitoring your score - VantgaeScore tracks credit scores quite similar to how FICO score does. Since both of the methods weigh similar factors and collect the same data from 3 main credit bureaus. 

FICO Score vs Credit Score

Often FICO score vs credit score is used interchangeably, but not many individuals are aware that both these terms differ with certain factors. Join us to know more. 

A credit score of an individual is decided on their credit history, which 3 main major credit bureaus combine the data to create credit reports. 

However, credit scores are calculated differently by different bureaus based on their method of collecting data to produce credit reports. Credit scores usually reflect an individual’s creditworthiness and are often considered an important factor to make decisions for lenders. Note, that your credit score can impact interest rates, credit limits, 

How is the FICO score different from the credit score?

When discussing FICO score vs credit score, often individuals assume both terms are the same. That’s not completely true! FICO is a credit score from a company delivering credit scores to customers and businesses. 

FICO score was introduced to provide the first standardized credit scores in 1989. Though, the company has introduced more versions of credit scoring or calculation models over the year (we will be discussing in detail in the blog later). 

In short, both are scoring methods and refer to the same thing. The only distinction factor is the method to measure an individual’s credit score for qualifying varied types of loans and tracking their usage or credit maintenance. However, FICO is most preferred by lenders, as it is approved by US law.

What is the Minimum FICO Score for a Construction Loan?

Before we delve into the minimum score limit, let's understand what a construction loan is. It is a short-term loan that aids in covering the cost of building a home. However, it is different from home mortgages and is considered specialty financing. Once the home is built, the applicant must pay back the amount for the cost of building the home. 

Taking about the FICO score criteria for construction loans, individuals must have a good credit report of a minimum of 750 or more score acquired from a recognized credit bureau like Experian, TransUnion, or Equifax. 

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How can I Improve my FICO Score?

As we discussed above, having a higher credit score range maximizes the chance of getting good terms and debt with lower interest rates. However, having a higher credit score requires having a combination of crest accounts and maintaining good credit history. Though, staying below your credit limit can help your score. The ideal credit utilization ratio is considered below 30%. 

If you max out your credit limit, delay your bill payments, or apply for new credits quite frequently will lead to lower FICO scores. To avoid such circumstances, you can check your credit score regularly and get yourself free from credit errors through the process discussed above. However, by law, you are entitled to access one free credit score report each year from credit bureaus. 

Read Also:- Best Ways to Improve Credit Fast

Measuring FICO Score

Usually, a company applies a proprietor formula to access the data from your credit report for producing your FICO score. 

You will observe that your score will vary because all 3 main credit bureaus that create your credit score use slightly different data and methods from each other. Hence, your score will also vary depending on the bureau you are referring to. 

What is a FICO score? What are the factors that determine calculating the FICO score? Having such concerns is common. FICO doesn't reveal the calculation formula but it outlines a detailed guideline about the factors impacting the score. However, paying on time and keeping your balance low about two-thirds of your score is considered the ideal practice to maintain an excellent Fico score. 

FICO Score FactorsPercentage value
Payment History35%
Amount owed by borrower30%
Credit History 15%
New Credit 10%
Credit Mix10%

Payment History (35%)

Paying your bills on time is the ideal path to getting an excellent credit score. Late payments can negatively impact your score similar to how having an account in collection or bankruptcy does. 

The Amount that you Owe (30%)

The amount owed by you is also termed credit utilization, it shows how much amount you are using from your credit - the lesser amount the better score. As we discussed above, try to utilize 30% or less of your credit limit. 

Credit History (15%)

This helps in analyzing how long you had the credit and estimates the average age of your credit account. 

New Credit (10%)

When you inquire or apply for new credit, they will check your score for 6 months. This is the reason why you must research credit card offerings and other eligibility criteria before you consider applying. 

Credit Mixture (10%)

Having installment loans - one with level payments such as a car or home mortgage or revolving credit - a credit card can impact your score. 

Varied Versions of FICO Scores

There are multiple versions of the FICO score because the company has updated its calculation methods over the years since its establishment in 1989. Though each version is accessible to lenders, it relies on them whether and when to implement these versions. 

However, the most widely implemented version is FICO 8 score, even after the establishment of better versions like the FICO score 9 and Fico score suite. Fico Score 9 was introduced in 2016, with an adjustment with medical collection accounts, increased sensitivity to rental history, and a more reliant approach to completely paid third-party collections. Though, it did not surpass the FICO 8 score’s popularity. The incorporation of the credit bureaus' data in FICO 10T may cause the FICO 8 score to be replaced in the future. 

As per the company, FICO 8 score has been consistent with previous versions, but a few features make it a more predictive method to get scores than previous versions. Like other previous versions, FICO 8 version represents the data that shows how responsibly a borrower pays the debt. The scores stay higher for individuals who pay bills on time, keep a low credit balance, and only new credit only for targeted or determined purchases. 

Ultra FICO, another version, is ideal for people who are new to credit or actively looking to rebuild their credit. It is on the same score range of 300-850 scale as FICO. The distinct feature includes a deposit account activity to calculate the scores. 

Good FICO Score Range

As per FICO, a good score range is around 670-739. However, a FICO score that ranges around 690-719 is considered good credit. Though, each lender or credit card issuer has the right to decide on the ideal score as the eligibility for a specific credit line. 

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Bottom Line 

The FICO score is one of the optimum tools to measure the credit worth of a borrower. The majority of lenders in the USA widely prefer using the FICO score to check credit reports for home mortgages. A low score can be difficult and disheartening for individuals, but you can seamlessly improve your credit score by maintaining a low credit balance, paying bills on time, and more. 

Frequently Asked Questions

Q.1 How is a FICO Score measured?

Based on different factors from your credit report, FICO scores will be calculated. The formula used by FICO is proprietary, but the general breakdown of factors outlined by the company includes:

1. Payment history (35%)
2. Amounts owed (30%)
3. Length of credit history (15%)
4. New credit (10%)
5. Credit mix (10%)

Q.2 How frequently is the Fico score updated?

FICO Score is updated right away when new information is reported to the credit bureaus. This can occur monthly or when your creditors offer updates to your account information. Note that a few accounts might update on different schedules, which means your FICO Score can change more frequently if you have several active credit accounts.