You are not alone if you are unsure what a FICO score is and the difference between a FICO score and a credit score. Having the answers to these questions and having a working knowledge of your FICO score and how to manage it could significantly impact your financial health.
What is a FICO Score?
A FICO score is a three-digit number that lenders rely on when determining whether someone possesses enough creditworthiness to qualify for various loan products and credit cards. Created by engineer Bill Fair and mathematician Earl Isaac in 1956, the lending tool's name is an acronym for the Fair, Isaac, and Company.
After developing the FICO method, Fair and Isaac sold the system two years later. The FICO score was introduced in 1989 as a way to evenly measure borrowing risk across the loan-approval process. Using this impartial math- and fact-based scoring system, lending institutions finally enjoyed an unbiased and consistent framework for their decision-making process. Now the industry standard, the FICO score effectively ended discriminatory practices and ushered in a level playing field for consumers.
Today, the three digits assigned to consumers powerfully influence borrowing power, interest rates, and terms. Millions of people enjoy access to loans and lines of credit to purchase homes and automobiles, pay medical expenses, take once-in-a-lifetime family vacations, and qualify for credit cards based on their FICO scores to a large degree.
In conjunction with other financial measures, a high FICO score helps people take advantage of low-interest borrowing and favorable terms. Similarly, a poor FICO score limits consumer options and often results in higher interest rates and monthly loan payments. Although a poor credit score can be daunting, many financial institutions remain open to working with customers to find financial solutions and offer guidance to help raise credit scores.
Although most loan professionals consider other factors when approving loans and credit card applications, your FICO score plays a central role.
What is the FICO Score Range?
The three major credit bureaus (Equifax, Experian, and TransUnion) usually assign people a score between 300 and 850. Consumers and even lenders tend to simplify FICO scores based on loosely-defined ranges and assign values from poor to excellent.
Knowing your FICO score range helps you understand what types of loan programs, products, and credit cards to consider from a practical borrowing perspective. Knowing that number can also motivate consumers to build their credit and improve them. That being said, loan professionals generally adopt the ranges and values listed below.
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Excellent: 800 to 850
To better understand how a FICO score impacts your quality of life, consider these numbers in terms of applying for a mortgage or getting pre-approval for an automobile loan. Low-income families living in rural areas generally need a score of 640 or greater to gain approval for a USDA mortgage secured by the federal government. The Federal Housing Administration backs the mortgages of qualified borrowers with a FICO score of 580 or greater. However, to qualify for a non-government-supported conventional home loan, borrowers usually need a fair-to-good FICO score of 620 or higher.
For most, the point is not necessarily whether you can qualify for a home loan, but what range your FICO score falls into, as this is the key factor in determining the type of mortgage you can secure. It also plays a crucial role in how much home you can afford.
What Affects Your FICO Score?
Knowing the way your FICO score is calculated can prove an invaluable asset. Because standardized methods are used, and specific percentages are assigned to designated areas of your financial portfolio, in many cases, consumers can quickly improve scores. FICO score calculations generally adhere to the following criteria.
- Repayment History: A thorough review of how you managed accounts comprises 35 percent of the total FICO score. The repayment of credit cards, auto loans, mortgages, child support, and even bills such as utilities and apartment rent can impact this portion of your score. Consistent, on-time repayment remains a key to raising or maintaining robust scores.
- Debt to Credit: Every consumer has a unique credit bandwidth. Companies that offer revolving lines of credit and personal and other loans influence your borrowing power. How much is utilized at a given time impacts 30 percent of your FICO score.
- Age of Accounts: Approximately 15 percent of a FICO score is based on the age of all your accounts. That’s why establishing good credit at an early age helps build FICO scores.
- Credit Inquiries: There are two types of credit inquiries. The first involves what is known as a "hard pull." A "hard pull" occurs when someone applies for a loan product or credit card. Official hard pulls generally reduce scores for upwards of six months. By contrast, a "soft pull" associated with pre-approvals has minimal effect on the 10 percent assigned to credit checks.
- Types of Credit: A mix of credit cards, personal loans, and other products influences 10 percent of the overall number. A diverse portfolio helps build a healthy FICO score.
It's important to remember that your FICO score is not necessarily a fixed number and changes based on these factors, which means you can take action to raise your score.
FICO Score vs. Credit Score: What’s the Difference?
Questions revolving around FICO score vs. credit score are common. Logic dictates that a singular, impartial system would arrive at one number, and zero confusion would exist. Although Fair and Isaac probably envisioned a perfectly consistent system back in the 1950s, lenders consider credit reports from three major bureaus — Equifax, Experian, and TransUnion.
The three major reporting organizations employ the standardized FICO system even-handedly. But they often base their calculations on access to different information, which can result in three somewhat different FICO scores for a single consumer. And for all intents and purposes, FICO score vs. credit score are interchangeable terms. Lenders enjoy the discretion to consider all three, favor one bureau over another, or view the three FICO scores holistically.
How Do You Monitor Your FICO Score?
If you are unsure where your FICO score stands, you have a right to request a free copy of your credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) every 12 months. Monitoring the content within your credit reports is essential to taking control of your finances. What's in these reports can determine what interest rate you receive, whether or not you're approved for a credit card or hired for a job, or your ability to rent. Reviewing your credit reports can also help you catch early signs of identity theft. Click here to learn how to order your free credit report.
Read our blog to learn about the "4 Credit Report Sections You Can't Ignore." If you need help improving your credit score, check out our Checklist of "12 Easy Steps to Raise My Credit Score."
If past errors or mistakes have damaged your credit score, there are steps you can take. This handout from the Consumer Financial Protection Bureau provides tips on how to raise or fix your credit score. If you have specific questions regarding how your credit score can impact the interest rate you receive on a mortgage loan, contact a Middlesex Federal Home Loan Specialist today.