The Complete Guide to Understanding Your FICO Credit Score

FICO credit score

Imagine a time before credit scores, when any variety of random factors, no matter how large or small, could lead to your approval or denial for a loan.

Before the late 1980s, there was no unilateral mechanism from which you would be judged as a borrower. While that might sound nice – scoring isn’t always fun, after all – what that actually meant was there was a great deal of room for discrimination.

One company decided to put an end to lending discrimination by creating a scoring system that would only show what mattered: your behaviors as a borrower, not what you look like.

This is the story of how the FICO credit score was created, why you should care, and how you can manage your score.

What is the FICO credit score?

The Fair Isaac Corporation created the FICO credit score in 1989 to help people gain fair access to credit. Fair Isaac created this score to replace “hunches” with calculations. Here’s the problem that led to this creation, in the company’s own words:

“In the days before credit scoring, people were often denied credit because there was no unbiased structure for evaluating them objectively. The system was not fair, fact-based or consistent.”

But once the score was developed, that all changed. “[It] took prejudice out of the equation, literally. The score’s criteria for evaluating potential borrowers are focused solely on factors related to a person’s ability to repay a loan, rather than one’s ZIP code or social status.”

As for the fair claim, FICO walks the walk by not including demographics like race, gender, marital status, income, employer, or other factors that have more to do with you as a person and nothing to do with you as a borrower.

Now it is mandated by law not to weigh these factors when determining a borrower’s eligibility. The Equal Credit Opportunity Act states a creditor “shall not inquire about race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) and (b)(2) of this section.”

As for rules (b)(1) and (b)(2), they refer to the voluntary disclosure of such information to the creditor, as well as the optional addition of a title such as Ms., Miss, Mr. or Mrs. on an application.

And with that, unbiased lending became an industry standard. So when you think about how frustrated you are by your credit score (as we all are sometimes), remember that it is in many ways there to help you.

How do lenders use FICO scores?

FICO isn’t the only credit score on the block anymore, but it is the most popular.

In fact, FICO has sold 100 billion of its scores – the most in the world. And FICO scores are used in 90 percent of all lending decisions in the United States.

Needless to say, FICO is leading the pack in credit scores. But the type of score your lender sees will vary based on the type of credit you’re applying for. That’s because there are base FICO scores and industry-specific FICO scores. Here’s how myFICO explains the difference:

Base FICO® Scores […] are designed to predict the likelihood of not paying as agreed in the future on any credit obligation, whether it’s a mortgage, credit card, student loan, or other credit product. Industry-specific FICO® Scores are designed to assess the likelihood of not paying as agreed on a specific type of credit obligation – car loans or credit cards, for example.

Lenders might choose to use industry-specific FICO scores because they “provide lenders a further-refined credit risk assessment tailored to the type of credit the consumer is seeking.” For example, a car dealership might use FICO Auto Scores, while credit card issuers might use FICO Score 8.

Not only are there different types of FICO scores, there are also different versions of each score. So even if a new version is released today, that doesn’t mean the lender you’re working with is using it.

That’s why it’s important to avoid getting hung up on finding the “perfect” score. Instead, aim to reach the highest credit score range. There’s no reason to strive for a perfect number when you know that the three digit number your lender sees will not always be the same as what you see.

Get the most out of your FICO score

Now let’s talk about how you can make sense of your FICO credit score. Here’s what you need to know.

1. Get your free FICO credit score

First of all, you need to be able to see your credit score.

There are a few ways to get your free FICO credit score. By now, you might even find that you can get your free FICO credit score from your current bank or credit card issuer.

This access is a fairly new development and one you should take advantage of. Years ago it was much more difficult to get a free FICO credit score. But the push towards more financial institution transparency for consumers and the rise in financial literacy has made changes on that front.

2. Know your FICO score range

When you get your score, don’t become fixated on the number. Remember, we all have many FICO scores. Instead, see what range you fall into. Here is a breakdown of the ranges:

  • Exceptional: 800+
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 579 and lower

If you get a few versions of your free FICO credit score, you might find you fall into different ranges. For example, one score might be 741, which puts you at the bottom of “very good.” Another could be 739, which puts you at the top of “good.”

This is nothing to worry about. As you can see, only three points separate the “good” and “very good” range in this example. That means making even small improvements in the score could bump it up to the better range.

3. Understand the factors of FICO scores

We already discussed certain things that don’t factor into your FICO scores, but it’s important to know what things do factor in. Here’s a condensed version:

  • Payment history = 35 percent
  • Amount of debt = 30 percent
  • Length of credit history = 15 percent
  • New credit = 10 percent
  • Credit mix = 10 percent
fico-scores

FICO Score Factors, myfico.com

Most of these are self-explanatory, but here’s an easy way to remember how FICO scores work.

  • Most of your score will be determined by your payment history, which means paying on time will help you and paying late will greatly hurt you.
  • The amount of debt you have, specifically revolving debt, is important. Keep your balances as low as possible to have a high score.
  • The longer your history with your lenders, the better your score.
  • Applying for too many new loans and/or lines of credit can hurt you – but this makes up a small portion of your score. Apply within reason and only when you need the new credit and don’t be afraid to rate shop.
  • The more of a mixture of types of credit you have, the more proof of your credit behavior lenders have. So if you have a credit card and student loans, mortgage, or auto loan, you have a good mix and your score will benefit from that.

4. Work to improve your FICO scores

There’s not a lot of good this information can do if you are powerless to changing it. Luckily, you’re not.

Everyone has the ability to improve their FICO scores – and it’s important to do so. Even if your score is good today, you’ll still need to maintain your status lest it should fall down a few notches without you even realizing it.

The best way to improve your score or maintain a good score is to follow a few best practices:

  • Pay every bill on time, credit or otherwise.
  • Maintain a 30 percent or lower credit utilization on your revolving debt.
  • Keep old accounts open.

There’s always more you can do to improve your score, but these three best practices will take you a long way. Combine them with a practice of regularly reviewing your credit report and disputing any errors if they come up so you can be sure you’ll have your best range.

Remember, you can get your credit report for free from each of the three credit reporting bureaus each year at AnnualCreditReport.com. Keep in mind that your credit score will not be listed on your credit report.

Why you should care about your FICO scores

We’ve covered a lot of ground on the FICO credit score. But if you’re wondering why you should care, listen up.

A low FICO credit score can prevent you from credit approval. And if you somehow manage to be approved, a low score can cost you money. CBS News uncovered just how much:

“A 30-year old with poor credit is likely to pay a quarter-million dollars more in interest payments over her lifetime (assuming an $18,000 car loan, $5,000 in credit card debts and a $400,000 mortgage) than a similar person with a pristine score.”

In other words, the person with poor credit will pay $250,000 in interest payments alone on her debt. In many towns, that’s the price of a house. Just in interest.

But what about decent credit? CBS News explains if your credit is merely good, not excellent, “you’ll pay about $30,000 more over your lifetime than that individual with excellent credit.” That $30,000 in interest could buy you a new car.

Remember, credit scores help you gain access to credit without being unfairly discriminated against. But they also help lenders understand your likelihood of repaying a loan.

Therefore, if your credit score is low, that likelihood looks low. So lenders will either deny your application or charge you a higher interest rate. That helps them mitigate against future losses in case you default.

It literally pays to know your FICO credit score. Find your free FICO credit score, work to get it to the highest range, and maintain your good status when you get it. That way your score won’t stand in the way of your financial goals – it will help you achieve them.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
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