Takeaways
- A FICO credit score ranges from 300-850; anything above 740 is considered very good.
- FICO scores are the most used credit scores by lenders.
- A high FICO score will give your access to better credit products.
- Five major factors affect your FICO score; it’s important to improve them all.
- FICO scores can be general or tailored for specific industries, like car loans.
Payment cards such as credit, debit, and prepaid cards have become the dominant payment form in the United States. With a boom in credit card usage, U.S. consumers now have an average of four credit cards. With this increase in credit consumption, it pays to know how credit works. That begins with understanding the importance of your credit score.
What is a Credit Score?
A credit score is a three-digit number between 300-850 assigned to consumers by credit scoring companies. Your credit score predicts your ability to repay a lender for a new loan.
If you are applying for a new credit card, mortgage, auto loan, or other consumer debt lenders request your credit score. The lender typically receives both your credit score and credit report to determine which credit products you are eligible for.
For example, if you have conducted your due diligence and decided to open one of the best credit cards, the credit card company will ask for your permission to request a hard inquiry on your credit. Your approval depends on the credit card company’s assessment of your credit score and overall credit history. Your credit score is a snapshot of a moment in time and can be improved or reduced based on your behavior.
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What is a FICO Score?
A FICO score is a three-digit number that ranges from 300-850. You can think of your FICO score as a summary snapshot of your credit history from your credit report.
The FICO score was first introduced in 1989 by the Fair Isaac Corporation (FICO) to promote a consistent way of measuring a consumer’s creditworthiness. The FICO score was designed to help both lenders and consumers understand what the key factors were in determining the credit score, offering a refreshing degree of transparency to a once opaque and fragmented industry.
FICO scores are used by lenders to help determine your ability to repay a new loan. When you apply for a new credit card or personal loan, a lender must assess your ability to make consistent payments over time and eventually pay off your loan. An excellent FICO score can save you thousands of dollars in interest payments, and credit card companies offer premium perks to their best customers with high credit scores. It pays to have a good FICO credit score.
What is a Good FICO Score?
There is single magic number for a good FICO score. Instead, the prevailing theme is that FICO credit score ranges capture consumer behavior. Thus, your credit score is usually bucketed into a rating from poor to excellent.
Below are the ranges of FICO scores and their rating:
- Poor – 300 – 580
- Fair – 580 – 669
- Good – 670 – 739
- Very Good – 740 – 799
- Excellent – 800 – 850
It is important to note that FICO scores are not static. The FICO scoring models are updated periodically based on evolving consumer behaviors to accurately reflect what good consumer behavior looks like.
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Smart Tip:
Smart Money Tip: You should check your credit score and focus on improving your credit score ahead of any sizable financial decisions: buying your first home, purchasing a car, or getting a personal loan.
What is the Average FICO Score?
As of April 2022, the average consumer in the U.S. has a FICO score of 716. This score falls in line with the “Good” credit score of 670-739 and is a cohort that is either near or slightly above the average U.S. consumer FICO score. If you want to be above average and receive better interest rates and credit card benefits, you should focus on rebuilding your credit. If you don’t have a long credit history, focus on the key factors in a FICO score to build your credit over time.
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Key Components of a FICO Score
According to FICO, there are five major components to a FICO score, each with a different weight of importance. The FICO credit score calculator uses a proprietary model and doesn’t fully reveal its secret sauce, but it does offer guidelines, and critical factors used in calculating credit scores. Below are the dominant factors in determining your FICO score from your credit report.
- On-Time Payment History (35%): This considers if you have paid off credit balances in the past. Your payment history provides the lenders with an insight into the degree of risk they have lending you capital for a new loan or revolving credit line, like a credit card.
- Credit Utilization (30%): Lenders don’t want you to get over-indexed towards debt. Lenders want you to have a healthy degree of debt that you can pay back. More important than total debts owned is your credit utilization, or the degree of available debt you use.
- Length of Credit History (15%): As a rule of thumb, the longer your average credit line, the better your FICO score. FICO scores look at the spectrum of older, newest, and average credit account length.
- New Credit Applications (10%): If you don’t have a long credit history, opening many credit accounts all at once is perceived negatively by lenders.
- Diversity of Credit Mix (10%): FICO scores analyze mortgages, credit cards, retail accounts, and other consumer loans. While it is not essential to have all types of credit, a diversity of credit types helps.
Your FICO score is computed using a holistic approach to your credit report. Not all FICO scores are calculated the same. For example, if you are new to having a credit card, your FICO score will be calculated differently from someone with a 30-year credit history.
Smart Summary
Your FICO score has a significant impact on your ability to get credit. Lenders want to see that you are a proven product when it comes to your propensity to pay off your debts. Focus on boosting the five factors contributing to your FICO score and concentrate on attaining a high FICO credit score. Get into the smart money habit of monitoring your score regularly, and a rich life will follow.
