What is a FICO score and is it important?

Your financial history is often obtained by a single three digit number. The FICO score is a culmination of several factors that show overall credit history. It’s most likely one of the most important factors in your financial portfolio. It’s the first thing a bank will look for in the home mortgage or car loan process. Some employers will also look at this important number during hiring phase.

How is a FICO Score Calculated?

The FICO score was created by Fair Isaac Corporation and is a score that combines several pieces of your credit history information. Scores use a combination of credit history and usage. This complex scoring method also takes in account the length of credit history. Individuals with new credit should take note that it will take a few years for the score to go up. The average credit score is approximately 690. Over 37% of adults admit they don’t know their credit score. It’s important to know what makes up the scoring model:

• Payment history

This is the most substantial factor in scoring at 35-40%. Payment history takes into account both positive and negative payments. Derogatory items such as collections are factored in based on the first initial late payment

• Length of time

How long credit was used overall is an important factor. It takes up roughly 15% of the scoring model.

• Type of credit usage

The percentage of revolving and installment debt can be a factor in this percentage that takes up another 10-15%.

• Debt owed

Between 30-35% of the FICO score is obtained from this piece of information. The amount of debt owed shouldn’t exceed an appropriate debt-to-income ratio.

• New credit authorizations

This area makes up roughly 10% of scoring. Hard pulls or credit applications show in the report in this area.

Additional FICO rules

The FICO score can remain unchanged or go up and down rapidly depending on credit habits. Each individual credit bureau will calculate the score using a slightly different formula. The difference may be a few points between each report. Your FICO score will change over time depending on credit habits.

The Importance of a High Score

Obtaining a high FICO score is a result of managing credit in a healthy way. Employers and banks will be more ready to hire and lend since it shows responsibility. There is a general rule that anything over 720 is considered prime or excellent credit. Different types of debt will have an impact on the score. Improving credit will require a healthy combination of installment and revolving credit history. Revolving credit is usually a credit card of unsecured debt and will have the most immediate impact on credit history. Installment debt is considered secured and could be a student loan or home mortgage.