Do you know what your FICO score is? Do you know what types of things affect your FICO score? Or what types of things your FICO score affects? Maybe you know that a low score is bad and a high score is good, but do you know what numbers are considered good or bad? The following is an overview of FICO scores to help you better understand what it is and why it is important.
What is a FICO Score?
FICO is an abbreviation for Fair, Isaac & Company and is the name of the first company to create a credit scoring system. Today, three major credit bureaus, Equifax, Trans-Union and Experian, report FICO scores,…more commonly known as credit scores. Each company evaluates factors in slightly different ways, so a FICO score can differ between the three bureaus. Scores range between 300 and 850, with low numbers being poor ratings and high numbers being good ratings.
What Affects a FICO Score?
A FICO score is affected by many factors:
- late payments;
- the length of your credit history;
- balances that are too close to credit limits;
- public records (such as bankruptcies or tax liens); too many accounts;
- too few accounts;
- no accounts;
- too many accounts opened within the last year.
How can it can be bad to have too many accounts open, but also bad to have too few accounts or no accounts? It can get pretty complicated and each factor is ranked differently by each of the three credit bureaus. A score around 750 is considered to be very good, whereas a score of 620 or below is considered to be poor. With a low score, some lenders may work with you, but you probably will not get the best interest rates.
What does a FICO Score Affect?
A FICO score will affect your ability to get a loan and will affect the interest rate on that loan. Lenders have studied the correlation between credit scores and late payments on mortgages and discovered that borrowers with lower scores have a higher chance of being 90 days late on a payment than borrowers with higher scores. For example, a borrower with a credit score of 615 has a 9 to 1 chance of being 90 days late on a payment, whereas a borrower with a score of 700 has a 288 to 1 chance of being late. Because of these odds, lenders prefer to work with buyers with higher scores. Some lenders will chose to work with borrowers with lower FICO scores, but may charge higher interest rates to protect themselves in case of delinquency.
Overview of FICO Scores
FICO scores are used by many financial institutions as an objective measure of your credit worthiness. It can therefore play a huge role in the opportunities available to you. It is important to understand your score and to practice good credit behavior to maintain and improve the score that you have.