Your credit score is essential to your livelihood. A favorable score can save you lots of money by lowering your borrowing costs. It can help you purchase a car or a home, get financing to launch a new business, and help you build savings and long-term wealth.
What is a FICO score?
FICO is an acronym derived from Fair Isaac Company, the company that developed the software to calculate your creditworthiness. The actual algorithm to determine your score is not known; however, we know that a number of factors are used to determine your score, including your payment history (35%), the debt you owe (30%), the length of your credit history (15%), new credit (10%), and kinds (mix) of credit you have (10%).
Your score can range from 350 to 850. Scores below 580 are considered poor. A score between 580-669 is considered fair and 670-739 is considered good. A 740-799 score is very good, and an 800+ score is exceptional. The average FCIO score is just over 700. In today’s lending environment, to get approved for a consumer loan from a bank generally requires a score of 670 or better.
FICO does not take into consideration your income, age, ethnicity, gender, religion, etc. The formula looks solely at your credit reports from the three main credit bureaus – Experian, Equifax, and Transunion – and then spits out a number. That number is used by the vast majority of lenders in the US to determine whether you will be approved for credit, the structure of the credit, and the rate, terms and fees.
One thing to note is that the FICO score is designed to measure borrowing activity for traditional forms of credit (bank loans, credit cards, etc.) It doesn’t account for rent payments or nontraditional financing that may not be reported to a credit bureau. Underserved communities often face a disadvantage because the system doesn’t provide a measure of the ways they use credit.
The use of your FICO score extends beyond your application for credit. Not everyone can retrieve your credit score. The Fair Credit Reporting Act does, however, allow creditors, landlords, mortgage companies, government entities, insurance companies, utilities, and a few others to pull your credit score. Some employers will conduct financial checks, including pulling your credit and FICO information as part of the hiring process. If you want to rent a new place, the landlord will pull your credit and score and look to see if there have been any past evictions.
One of the first things you should do is request a free copy of your credit report. Once a year you are entitled to get a free copy of your report from the three national reporting agencies. You can go to annualcreditreport.com to request it. Pull your reports and review to see if there are any errors or discrepancies, then contact the agency where they appear and get any issues resolved. One thing to note, we have found that the FICO score you obtain may not be the exact same FICO score supplied to lenders, so just be aware that it may not be the same.
For more information about how to build, maintain and improve your credit score, see this related article by Craig Kirkland.