Credit scores overwhelm people

What is a FICO Score?

You're probably familiar, at least somewhat, with FICO scores. However, what you might not know is precisely what the FICO score means, how it directly affects you and your financial well-being, and how to go about improving your score.

What is a FICO Score?

FICO, which stands for Fair Isaac Corporation, is a credit scoring software program that takes your credit information and financial data, and uses it to calculate your credit score. There are currently three agencies that utilize this program: TransUnion, Equifax, and Experian.

What does a FICO Score Indicate?

There are a number of factors that can affect your FICO score, some of which are valued more than others. The following are a list of the items that the FICO program will use to calculate your three digit credit score:

  • 35% Payment history, which includes late and missed payments
  • 30% Total debt
  • 15% Credit history length, with longer credit histories typically being preferable
  • 10% New credit
  • 10% The type of credit you possess, with low-interest, longer accounts being preferable.

Student loans, home mortgages and the like are typically considered better than credit cards and other revolving accounts

What is the Meaning Behind Your Score?

Once you get your FICO score, you may be wondering whether your score is a good one or if you have room for improvement. In general, a score over 700 is considered a great score. Scores in this range are more likely to get you lower interest rates, since you're considered to be a low risk borrower. If you have a score between 600 and 699, you are in fair shape, but you could definitely spend some time looking at how you can improve your score. Scores that range from 500 to 600 are considered low and can make it very difficult to obtain credit or loans and, if you are granted credit, you will likely have to pay significantly more in interest.

How Can Your Score Affect You?

Your FICO score is commonly used by lenders as a way to determine if and how they will provide you with a loan. Everyone from car dealerships, landlords, banks, mortgage lenders, and credit card companies will calculate your credit score so that they can determine both if they will work with you as well as the interest rate that you will be granted. Even some employers use your credit score to determine your eligibility for the job. This is particularly true if the job will involve handling finances for the company. In short, your FICO score can truly touch every aspect of your life.

How to Improve Your FICO Score

While improving your FICO score is certainly not an easy task, there are a number of ways to go about it. Making sure that you stay up-to-date on your payments is the most effective way to bolster your score. Additionally, keep your debt low, avoid opening additional credit accounts, and think twice before closing old accounts that you have held for a long period of time.

Last Updated: September 09, 2014