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What Is a FICO Score and Why Does It Matter?

A good FICO score can help you get approval on credit cards and important loans. What is it, and what makes for a good score?
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Trying to buy a house or a car? Looking to get another credit card, or maybe take out a loan? If so, you're plenty aware of the importance of a FICO score.

If you're not, though, you should get familiar with it quickly. Because banks and other lenders are intimately familiar with FICO scores, how they're calculated and the minimum score they want a borrower to have before giving out a loan. The more you know about building up your FICO score, the better chance you have of building a larger one and helping your chances of getting the loan you've been looking for.

So what is a FICO score, how do you improve yours and what makes it different to certain credit bureaus?

What Is a FICO Score?

A FICO score is arguably the most commonly used credit score, the one people tend to think of when they think of checking their credit score. Standing for the name of the company that initially developed it (Fair Isaac Corporation (FICO) ), your FICO score looks at the history of your credit and uses it to churn out a three-digit number that lenders use to gauge how likely it is that you will be able to repay the credit they are lending you.

Though Fair Isaac Corporation was founded in 1956 (as Fair, Isaac, and Company), they didn't introduce the FICO score until 1989, and by 1991 they were available at Equifax (EFX) , TransUnion (TRU) and Experian (EXPGY) . Over the ensuing decades, they would continue to expand the availability of the FICO score to different lenders in different industries.

Though there are other credit scores out there (and we will discuss the differences between them and FICO scores a little further down), credit score has become a bit synonymous with FICO score, often used interchangeably.

In addition to the general FICO score, there are industry-specific FICO scores - industries like credit cards, auto lending and mortgage lending - that will be factored into those loans.

What Is a Good FICO Score?

The range for a base FICO score is anywhere between 300-850, while the range for industry-specific FICO scores is 250-900. These are reasonably wide ranges for your scores, and yet small differences can do wonders for your score - or, alternatively, crater it.

Unsurprisingly, the higher your FICO score is, the better credit you appear to have. Having a FICO score in the 800s means you have a particularly phenomenal score, while one in the 700s is seen as very good. If your credit score is over 650, you're still in good shape with your FICO score.

From there, though, you may have some problems. The lower half of the 600s is seen as fair, but could still use improvement. Going further down from there, from the 500s to the 400s to the 300s, your credit will likely be seen as anywhere from mediocre to incredibly dire. And with these credit scores, you're going to have a very difficult time securing that credit you've been searching for.

That is what is at stake when creating a good FICO score. You could have relative success in other aspects of life, but with a poor FICO score you could still find yourself unable to get approved for an auto loan or a mortgage. A respected FICO score opens up the door to securing important loans, so you should understand how to go about improving it.

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What Determines Your FICO Score?

Having a number from 300-850, by itself, sounds like an awfully arbitrary way to view your credit history. What's the method to the madness that is your FICO score?

Generally, your FICO score is determined by five different factors with varying degrees of importance. These factors are:

  • Payment History (35%)
  • Amount of Credit Owed (30%)
  • Length of Credit History (15%)
  • New Credit (10%)
  • Credit Mix (10%)

Your payment history is the most important factor when determining your credit score. If you have a credit history, lenders are looking to see if you consistently make your payments on time or not to determine the likelihood that you will do the same for them. If you're paying on time, it goes a long way. If you're failing to pay on time, it can hurt you. The longer the time between the due date on a payment and the actual payment, the more it can hurt you.

The amount of credit you have at your disposal vs. the amount you actually owe is also important in determining whether you have a strong or weak FICO score. So if you've got credit cards, how much are you paying in relation to how much is available to you? That ratio is crucial, more so than the actual amount. Someone who is maxing out their credit is more likely to have a worse credit score than someone who is using a more responsible amount.

Length of credit history isn't as large a percentage as the first two factors, but it can go a long way. The length is judged by how long you've had your oldest open account, and generally a longer credit history is more favorable to your FICO score. This doesn't necessarily mean a short credit history is devastating, but a long history of paying your balance shows trustworthiness. It also means that if you cancel a credit card and it impacts what your credit history looks like, you could wind up with a lower credit score.

Similarly, how recent was your last credit account opened? That can have import as well. If it's too recent, some lenders could see that as risky, especially if it's multiple accounts in a short span. In the short-term, these new accounts can put a dent in your FICO score.

Having a line of credit for every possible industry is not a requirement for a good FICO score. However, having multiple forms of credit (for example, an auto loan and a credit card) that you're making timely payments for can also show lenders that they can trust you, and positively impact your score.

FICO Scores vs. Other Credit Scores

FICO is the most widely used form of credit score, but it certainly isn't the only one. In 2006, Equifax, Experian and TransUnion joined forces as the most prominent credit unions to create VantageScore. A competitor designed to possibly more accurately determine someone's credit score, it has some differences in how it calculates certain factors but shares similarities, such as the 350-800 range.

In addition to using certain factors that FICO does (payment history, credit history, credit mix, new credit, credit owed) it may also factor in the current balances you owe.

Though VantageScore is likely to give you a similar score, the percentage of how their factors are accounted for could cause a difference.