Credit Card Guide

What is a FICO Score?

26 October 2011 by CreditCardsCo™

A FICO score is the most widely used and the most well known credit scoring system in the United States of America today. It is based on the Fair Issac Corporation credit model which was first developed in 1958 by engineer Bill Fair and mathematician Earl Issac.

The FICO score is used by all three of the major credit bureaus in the United States to provide an at a glance look at a person's financial history and estimates the amount of risk involved in lending to that person. Banks, credit card issuers, and other financial institutions use this information to make decisions about lending money.

Why Is My FICO Score Important?

Having a good FICO or credit score is important as it will follow you through your entire adult life. It will have an effect on your ability to borrow money and can even affect the interest rate you are offered. If you apply for credit of any sort, be it a mortgage, credit card, or bank loan, the lender will run a credit check and the result will determine the success of your application.

A FICO score of over 620 is generally considered good; anyone with a score below that will face considerable difficulty in obtaining credit or financing without being subject to a very high rate of interest. The higher your FICO score, the more likely it is that your application for financing will be approved by the lender as you will pose a much smaller risk of defaulting. Some lenders, especially certain premium credit cards, will also offer favorable interest rates to those clients deemed to have an excellent credit score, usually of above 750.

How Is a FICO Score Calculated?

A FICO score ranges from between 300 and 850 and is calculated based on five key pieces of information: the timeliness of your bill payments, your level of debt, the types of accounts you have, the length of time you've had credit, and the number of recent credit card applications you have made. These pieces of information are not treated equally -- some aspects of your credit history are much more important than others. The bulk of your FICO score comes from your payment history (35%) and how much debt you actually have (30%), so these are the main areas to keep in good order. Length of credit history accounts for 15%, while new credit applications and the types of accounts held both account for 10% each.

How Can I Improve My FICO Score?

If you have made some financial mistakes in the past and now have a low credit score as a result there is no need to worry. Your FICO score is constantly updating, so for every month that you improve your financial habits your FICO score will improve gradually. There are a number of different ways to improve your FICO score.

It is best to start with the basics and ensure that all of your bill payments are always made on time. Since payment history is such a large part of your FICO score, making regular, timely payments will have a good impact on your credit score over time. The next step is to reduce the amount of debt you have as this is the area which has the second largest impact on your FICO score. If you can manage to reduce your debts you will make a difference to your credit score.

Conclusions

In conclusion, your FICO score can have a large impact on your life. It is important to maintain a good credit rating if you ever wish to apply for a loan, a mortgage or even a credit card. However, if you do end up with a low FICO score through bad financial decisions it is possible to improve your credit rating over time.

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