What Is A FICO Score? – A Score That Determines Your Creditworthiness

Potential creditors may want to gauge how likely you will pay your bills on time when you apply for a credit loan. Many creditors use FICO credit scores to assess applicants, manage accounts, and determine rates and terms. 90% of lending credit decisions in the US depend on the FICO score.

A FICO score is the number that creditors use to determine someone’s creditworthiness. Financial institutions and lenders use this as a guide to determine how much credit they can offer a borrower and at what interest rate. The FICO score is a three-digit number ranging from 300 to 850; the higher the number, the better. For that reason, everyone from insurance companies to banks and mortgage lenders uses FICO.

Fair Isaac Corporation was founded in 1956 by an engineer and a mathematician, Bill Fair and Earl Isaac. Called initially Fair, Isaac, and Company, the organization built its first credit scoring systems in 1958, after two years of its foundation.

FICO debuted its first credit bureau risk score in 1981 and went public in 1987. By 1991, all three major US credit bureaus: Experian, Equifax, and TransUnion, used the FICO scoring system to help banks make lending decisions. In 1981, Fair Isaac Corporation, a data analytics company more commonly known as FICO, realized the need for a simple yet effective way to help the credit bureaus clarify consumers’ credit reports.

This led FICO to create an industry standard for scoring creditworthiness that continues to be the most widely used scoring model. Understanding how your financial decisions can affect your credit scores is crucial to maintaining good financial health. Before you apply for your next loan or credit card, let’s explore a few things you should know about your scores and how they can affect your ability to borrow money.

Why are your FICO scores important?

Do FICO scores play a pivotal role in fetching you the loan? Yes! It’s essential to maintain a FICO score that lenders find satisfactory to lend you a credit loan. You can gauge the importance of FICO scores by looking for the insurance and utilities companies that check customers’ FICO scores before agreeing upon the terms and conditions.

The higher your credit scores, the more chance you will have to end up with better rates and terms on your loan. With lower scores, if you receive a loan, it may be with strict credit terms than if you had higher scores. However, in the case of insurance companies, lower scores could lead to higher premiums. Knowing your scores may help you determine the likelihood of your application getting approved and whether the creditor will likely offer you favorable terms.

In some cases, a lender may even have a threshold that your scores must meet or pass to get approved. You can check the lender’s website or ask a representative to determine a threshold to be approved and which scoring model(s) the company uses. However, some companies may not share this information.

What are the different FICO scores?

To help lenders understand the FICO score and make an informed decision about whom they should grant loan, the FICO scores updates on periodical bases. There are several versions available of FICO score, however the most common and widely used version is FICO 8. We will next present to you the FICO versions along with which credit bureau uses them and for what purpose.

What factors matter for a FICO score?

The FICO credit scoring model looks at five key factors and weighs each differently:

Payment history (35%)

Your payment history is the most crucial factor of your FICO score and has the most impact. The repayment of past debt is taken into careful consideration. Therefore, one of the best ways to improve or maintain your FICO score is to make on-time payments consistently.

The amount owed (30%)

The amount that you currently owe to lenders. Your FICO score’s second most important factor is your overall credit utilization or the percentage of available credit used vs. borrowed. This area gives a snapshot of your present financial situation.

Length of credit history (15%)

It is as simple as it sounds; this is the length of time your credit accounts have been open. The longer your credit history, the better; there is more data and payment information for the financial institution or lender to use as a guide.

Credit mix or types of credit used (10%)

Credit mix is the different accounts and loans on record. The combination of mortgage loans, auto loans, credit cards, and other types of loans is factored into the mix.

New credit (10%)

New accounts/loans and the quantity are factored into your FICO score as well. Opening several new credit accounts can quickly alert and represent a possible higher risk.

FICO score range

You have probably heard that lenders consider consumers with higher credit scores less risky than those with lower scores. Usually, the higher your scores are, the more likely you are to have approval for a loan and qualify for lower interest rates. But do you know how high your FICO scores should be to be considered good?

FICO defines five credit score ranges based on FICO Score 8:

Equifax FICO score

There are three credit bureaus: Experian, Equifax and TransUnion that assign consumer credit scores based on the unique information in their credit reports. This means someone may have a different FICO Score among the different models and a different score from each of the credit bureaus.

The Equifax credit score is an educational credit score developed by Equifax. Equifax credit scores are provided to consumers for their own use to help them estimate their general credit position. Equifax credit scores are not used by lenders and creditors to assess consumers’ creditworthiness.  Equifax widely uses FICO score versions 8 and 9.

Is a FICO score the same as a credit score?

Not all credit scores are FICO scores. For over 25 years, FICO Scores have been the industry standard for determining a person’s credit risk. Today, more than 90% of top lenders in the US use FICO scores to make faster, fairer, and more accurate lending decisions. Other credit scores can be very different from FICO Scores, sometimes by as much as 100 points.

Lenders trust FICO scores to be a fair and reliable measure of whether a person will pay back their loan on time. By consistently using FICO Scores, lenders take on less risk, and you get faster and fairer access to the credit you need and can manage. FICO scores use unique algorithms to calculate your credit risk based on the information contained in your credit reports. While many other companies design their credit scores to look like a FICO Score, the mathematical formulas they use can vary greatly.

There are other credit scores by various companies as told before, however, the methods used by other companies can lead to credit scores that are very different from FICO scores. And even just a few points difference can have significant consequences on your terms and rate costing you hundreds or even thousands of dollars.

What is a good FICO score?

The answer to this query depends on the lender or creditor reviewing your scores and their criteria, but it is essential to know what range your credit scores fall in. Higher credit scores are better than lower scores, and on the 300 to 850 scale, scores of 670 and above might be considered “good.”

A good credit score can help you get approved for attractive rates and terms when applying for a loan. However, stating whether or not a particular credit score is good might have a few complications. That’s because the threshold for what lenders consider good can vary based on the type of loan you will apply for and which lender is reviewing your information.

If you want to get the best credit cards, mortgages, and competitive loan rates, which can save you money over time. Exceptional credit can help you qualify. Exceptional credit is the highest tier of credit FICO scores you can have.

When you apply for credit, lenders review a detailed summary of your financial history, known as your credit report, to determine whether you qualify for a particular form of credit. However, one part of your credit report is the three-digit number known as your credit score.

You must see the credit score helps you get the kind of loan you need.

Which lenders use which FICO scores?

The FICO scores present an idea of how lenders may interpret different credit score ranges; lenders and other companies can, and often do, differ in their opinions of creditworthiness.

For example, just because you have a good credit score for an auto dealer does not mean a mortgage lender would consider that same score to be a reasonable credit risk. Each lender has its criteria for credit scoring and its thresholds for a good score vs. a bad score. Here’s a look at the most common FICO scores used for each type of credit.

Mortgages

If you are seeking a mortgage, there is a probability that you will end up buying a loan from  Fannie Mae or Freddie Mac. These are government-backed mortgage companies, which set standards for FICO scores home lenders can use. Here are the FICO scores used in credit reports generated by the three credit bureaus:

• Experian: FICO Score 2 (Experian/Fair Isaac Risk Model V2),
• Equifax: FICO Score 5 (Equifax Beacon 5.0),
• TransUnion: FICO Score 4 (TransUnion FICO Risk Score 04).

Auto loans

After the mortgage, vehicles are often among the most expensive purchases the average adult makes in the United States. According to the Kelley Blue Book, an independent automotive valuation agency, the average new car price in 2022 is over $40,000 in the US.

For making a significant car, having a good credit score can be a game-changer for your financial decisions.

Though FICO has created several auto-specific scores, the base FICO 8 and 9 scores are still widely used in car lending. Here are the various FICO auto scores available, as well as which one’s credit bureaus tend to use:

• FICO Auto Score 2 (Experian),
• FICO Auto Score 5 (Equifax),
• FICO Auto Score 4 (TransUnion),
• FICO Auto Score 8 (Experian, Equifax, TransUnion),
• FICO Auto Score 9.

Credit cards

Like other lenders, credit card issuers will also evaluate your credit score to check your creditworthiness to proceed with your business. If your FICO score is higher than 670, it falls in the good credit category; if it’s in 740 to 799, it falls into the very good slot. Finally, Experian says that any score of 800 or more is considered exceptional. With scores like these, you can qualify for nearly any credit card on the market.

Let’s help you understand this with an example of the Blue Cash Preferred Card from American Express. This card provides 6% cash back at U.S. supermarkets (up to $6,000 per year in purchases, then 1%) and on selected U.S. streaming services. You will also get 3% back at U.S. gas stations and taxis, rideshare services, parking, trains, tolls, and buses. You will receive 1% cash back on other purchases, whereas you will also earn a $300 statement credit after you spend $3,000 in purchases within the first six months of card membership.

The Discover it Cash Back is another good option for you. With this card, you can get 5% cash back on bonus categories that rotate each quarter after you activate (on up to $1,500 in combined quarterly spending, then it’s 1%), as well as 1% cashback on general purchases.

Bear in mind that any credit score that a lender calculates for you depends on the same data and the information found on your credit report. Thus, if you focus on maintaining accurate, positive credit reports, your credit scores should be in good shape no matter who checks them and which scoring model the company uses.

How to improve your credit score?

If you have an average credit score, there are some ways to improve your score over time.

• Pay your bills on time every single month. Late and missed payments are the single most significant factor affecting your score.
• Lower your credit utilization. Credit utilization is measured by how much of your credit limit you use. For example, if you have a $10,000 limit and debt of $5,000, you are utilizing 50% of your available credit. Make an effort for 30% or less overall and on individual credit cards.
• Check your credit report. You can check your credit reports from each of the three credit bureaus once a year for free through annual creditreport.com. Reviewing your credit reports can help you spot any errors that may be harming your score so you can take steps to correct them.
• Consider a secured card. If you have poor or bad credit, building a credit history with a secured card can be an excellent way to start. Choose a secured card that reports to all three credit bureaus for the best chance of having your good payment behavior improve your credit standing.

How you can get your FICO scores free?

FICO works with more than 200 financial institutions to provide free access to FICO scores for consumer accounts. If you wonder,“What’s my FICO score?”, walk with us through six ways that you can get your FICO scores for free.

• Discover Credit Scorecard
• American Express credit cards
• Citibank credit cards
• Bank of America
• Credit unions
• Ally Bank

Discover credit scorecard

One of the best ways to access your FICO credit score for free is through Discover Credit Scorecard. This program is free whether you are a Discover customer or not. To get started, you will need to provide with some personal information, including your Social Security number. Further, you will be answering a few questions to help verify your identity. You might be wondering how this will affect your credit.

Since there is no hard inquiry, it will not have a negative effect on your credit. With the Discover Credit Scorecard, your score gets updated every 30 days, and you will never be paying a penalty for checking your score. While you are working to build your credit, you can use the Discover Credit Scorecard to help track your FICO score.

American express credit cards

American Express gives cardholders access to their free FICO score, as well as 12 months of FICO score history. The FICO score provided is based on your Experian credit report. Your FICO score is available through your online American Express account and gets updated periodically.

Citibank credit cards

Another credit card issuer that will provide your FICO score for free is Citibank. At Citibank, your scores are based on your Equifax credit reports and they update on a monthly basis.

Bank of America

Bank of America offers eligible cardholders free access to their FICO score. The score provided is based on your TransUnion credit report and updated each month. Moreover, you will also have access to a couple of useful charts.

The first tracks your recent scores over time, so you can see how you have been performing month to month. This can be helpful if you have been working to boost your credit. The second chart will show national FICO score averages. This allows you to compare your score against others.

Credit unions

If you do not like using credit cards, another option for getting your FICO scores for free is through a credit union. Not all of them offer this benefit, although if you belong to one, it is worth checking. A couple of larger credit unions that offer free FICO scores are Navy Federal Credit Union and DCU Credit Union.

Ally bank

If you are planning to purchase a new car, Ally Bank will provide you with a free FICO score when you use Ally Auto Online Services or use the Ally Auto Mobile Pay app.

Conclusion

A FICO score poses a great importance when you need to receive a loan. It is one of the kind credit scores that helps you prove your creditworthiness before your potential lender. If you look to receive a credit loan for purchasing a home or car etc. , you must know what is a FICO score. You can think of a FICO Score as a summary of your credit report. It measures how long you have had credit, how much credit you have, how much of your available credit is being used and if you have repaid on time.

FICO Score does not only help lenders make smarter, quicker decisions about who they loan money to, it also helps people get fair and fast access to credit when they need it. Because FICO Scores are calculated based on your credit information, you have the ability to influence your score by paying bills on time, not carrying too much debt, and making smart credit choices.