Most adults in the United States have at the very least, heard of a FICO® Score. However, most lack knowledge of the nitty-gritty of a FICO score – its meaning, how it differs from other credit scores, what it’s used for, why it changes, what a “good” FICO score is, and more.
Luckily, Prosper is here to answer all your FICO® Score questions and clear up any confusion so you can make the best financial decisions for yourself and your family.
A FICO® Score is a three-digit credit score created in 1989 by the Fair Isaac Corporation (FICO). Lenders use FICO® Scores to determine how likely a borrower is to repay a loan. Your FICO Score, as well as other factors on and off your credit report, determine how much you can borrow, at what interest rate, and how long you have to pay the loan or credit line back. FICO Scores assess credit readiness based upon five criteria: payment history, current debt, types of credit used, length of credit history, and new credit accounts.
To keep it simple, you can think of your FICO® Score as a summary of your credit report. Or, if you want to feel fancy, you can say “FICO Scores are a way to quantify and determine your credit readiness.”
The Fair Isaac Corporation (FICO®) is a large analytics company that creates software products for businesses and individuals. More than thirty years ago, FICO created an industry standard for determining credit scores, set out to be fair for borrowers and lenders alike. Before FICO Scores, there were several different credit scores that were all calculated differently, including some that used factors like political affiliations and gender.
A FICO® Score is used by more than 90% of top US lenders. This credit score standard helps lenders make better, more informed decisions about who they give credit to. In addition, a FICO Score offers consumers fast and fair access to credit. FICO scores are not static – consumers can positively impact their score by limiting the amount of debt, paying bills on time, and making reasonable borrowing and spending choices.
The standard FICO® Score range is between 300 and 850. The higher the score, the lower the risk to lenders. Generally, scores from 670-739 indicate “good” credit history, 740-799 are considered “very good,” and scores above 800 are assessed as “exceptional.” Lenders typically consider these scores as favorable and, in turn, will loan credit to these consumers. However, if your FICO Score is below 669, you may have a more challenging time finding financing with reasonable rates.
Improving Your Score
Borrowers can achieve a high FICO® Score by having a mix of credit accounts and maintaining a punctual payment history. Consumers should also be mindful to keep credit card balances much lower than their limits. You can almost instantly lower your FICO Score by maxing out credit cards, missing payments, and aggressively applying for new credit. In addition, industry experts recommend that consumers use a reliable credit-monitoring service to prevent unapproved charges and fraud that may affect your FICO Score.
Although consumers can explain and even dispute negative information on their credit report, having a low FICO® Score can be a common dealbreaker for lenders. Many lenders, specifically in the mortgage industry, maintain strict FICO minimums for approval – often down to the point. By maintaining and working to understand your FICO Score, you can increase your chances of borrowing money when you really need it.
As mentioned above, five criteria are used to determine your FICO® Score: payment history, current debt, types of credit used, length of credit history, and new credit accounts. Although FICO does weigh each category differently for each borrower, the five factors are generally weighed uniformly.
The major determinants of a FICO® Score are:
- Payment History – 35%: Payment history refers to whether or not you pay your credit accounts on time. Credit reports show payments submitted and missed for each credit line and detail collections, bankruptcies, liens and settlements.
- Accounts Owed/Debt Burden – 30%: This category is essentially how much money you owe. This includes the number of active credit lines you have, the age of your accounts, and how much of your credit you are using (aka, your credit utilization ratio). Having a lot of debt does not necessarily mean a low FICO® Score. Instead, FICO considers your credit utilization ratio to weigh more than the amount owed.
- Length of Credit History – 15%: In general, this category takes three things into account – how long your oldest account has been open, the age of your newest account, and their average.
- Credit Mix – 10%: This is the variety of credit accounts you possess. Consumers need a good mix of credit cards, retail accounts, loans, and mortgages to have a high FICO® Score.
- New Credit – 10%: New credit refers to recently opened accounts. If you’ve opened many new accounts in a short period, lenders may see this as risky behavior.
Much has changed in the more than 30 years since FICO® Scores were created. In response, FICO has continued to innovate on its scoring models to consider changes in factors like credit-lending requirements, credit use, data reporting, and consumer demand. The result is that there are multiple FICO Score versions, including the most widely used, FICO® Score 8.
As of 2021, FICO® Score 8 is the most widely used FICO Score version, despite being followed by a FICO Score 9, and even FICO Score 10. When a new FICO® Score version like FICO® Score 10 is released, lenders individually determine if and when they will upgrade. This is why some lenders use different versions of your FICO Score.
FICO® Score 8, like its predecessors, conveys how responsibly a borrower handles their debt. Scores are higher for those who pay on time, keep low balances, and only open new accounts for reasonable, targeted reasons. Those with lower scores can be frequently late in paying their bills, overburdened with debt, or irresponsible in their credit decisions.
Other FICO® Score versions are industry-specific. Core FICO® Scores –like FICO® Score 8 – predict the likelihood of payment on any credit accounts, including mortgages, credit cards, student or auto loans, etc. Industry-specific FICO Scores provide a more refined risk assessment to lenders per the type of credit the borrower is seeking.
If you’re looking to finance a car, apply for a personal or student loan, or buy a house, the experts at Prosper recommend keeping an eye on both your FICO® Score 8 and your FICO Score 5. Lenders still frequently consider this in auto lending, credit accounts, and mortgages.
The Bottom Line
By better understanding your FICO® Score, you gain agency over your borrowing power, spending, and ultimately, your future. If you’re looking to improve your financial future by consolidating your debt, need help raising your credit score, or are looking for a personal loan, Prosper has products and services tailored to every consumer’s needs.
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