{"id":30166,"date":"2022-11-23T08:27:47","date_gmt":"2022-11-23T16:27:47","guid":{"rendered":"https:\/\/financer.com\/?post_type=wiki&p=30166"},"modified":"2024-01-19T08:15:26","modified_gmt":"2024-01-19T16:15:26","slug":"fico-score-how-it-works","status":"publish","type":"wiki","link":"https:\/\/financer.com\/personal-finance\/articles\/fico-score-how-it-works\/","title":{"rendered":"FICO Score: How It Works [Complete Guide]"},"content":{"rendered":"\n

FICO scores<\/a> have been around for more than 25 years and they have become one of the most popular factors when determining your creditworthiness.<\/p>\n\n\n\n

Created by the\u00a0Fair Isaac Corporation (FICO), the FICO Score model is continually updated to ensure lenders can make informed decisions when assessing a borrower’s application for credit.<\/p>\n\n\n\n

In this guide, we look at what FICO scores are, how they work, and how you can improve your score to get the best loan terms. <\/p>\n\n\n\n

> Short on time? Get your FICO Score free right now <\/a><\/strong> <\/p>\n\n\n\n

What Is a FICO Score?<\/h2>\n\n\n\n

A FICO score is a three-digit score between 0 – 850 that is calculated based on the information on your credit report. <\/p>\n\n\n\n

This includes things like your payment history, outstanding balances, and credit utilization and it is designed to predict how likely you are to repay a loan<\/em> if you were to take one out.<\/p>\n\n\n\n

Lenders use this information to decide whether or not to approve your loan application and what interest rate they will offer you. <\/p>\n\n\n

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A higher FICO score means that you’re seen as a lower-risk borrower and thus may be offered better loan rates<\/a>.<\/p><\/div>\n\n\n

If you’re looking for the best loan terms, understanding how FICO scores work can help you choose the right lender and obtain the best terms on a loan.<\/p>\n\n\n\n

How Do FICO Scores Work?<\/h2>\n\n\n\n

There are three credit bureaus in the United States: Experian, Equifax, and TransUnion. Each one uses a different method to calculate your FICO score. <\/p>\n\n\n\n

The most common scoring model is the FICO Score 8<\/a> from Fair Isaac Corporation. It’s used by 90% of lenders when they’re making decisions about loans.<\/p>\n\n\n\n

FICO scores use\u00a0data in five different areas<\/strong>\u00a0to determine a borrower\u2019s creditworthiness: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts.<\/p>\n\n\n\n

FICO scores range from 300 to 850<\/strong>, with most people falling somewhere in the 600s or 700s. Lenders use this number along with factors like income, employment stability, and outstanding debts when considering whether or not to extend a loan or credit to a borrower. <\/p>\n\n\n

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You might be shocked to learn that you technically need to have 21 lines of credit open to hit the perfect 850 FICO score.<\/p><\/div>\n\n\n

Example:\u00a0<\/strong>You have a credit score of 600 but only have one credit card with a $2,000 limit. By opening a second card with an $8,000 limit on it, you might see your score shoot up by 80+ points on your FICO reports.<\/p>\n\n\n\n

There are many reasons for this, but basically, if you can show creditors that you can successfully manage large lines of credit, they consider you trustworthy.<\/p>\n\n\n\n

This behavior is viewed as a positive to other lenders who are willing to now work with you more because you display a healthy relationship with managing money.<\/p>\n\n\n\n

What Is a Good FICO Score?<\/h3>\n\n\n\n

A good FICO score<\/strong> is typically a score between 670 and 739<\/strong>. Here’s a full breakdown of FICO scores and what they may mean for borrowers:<\/p>\n\n\n\n

Score<\/th>Rating<\/th>Lending Opportunities<\/th><\/tr><\/thead>
<580<\/td>Poor<\/td>Loan applicants may struggle to get credit without a deposit. It can be difficult to be approved for credit with this rating.<\/td><\/tr>
580-669<\/td>Fair<\/td>Applicants may still struggle to get optimal lending rates and may still be rejected by certain lenders.<\/td><\/tr>
670-739<\/td>Good<\/td>Most lenders will provide credit to those with good lending however they may offer average lending fees.<\/td><\/tr>
740-799<\/td>Very Good<\/td>Most applicants may receive better than average lending rates.<\/td><\/tr>
800-850<\/td>Excellent<\/td>Less than 22% of\u00a0Americans have excellent credit<\/a>. Those with credit scores<\/a> at this level are considered optimal applicants.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

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How Are FICO Scores Calculated?<\/h3>\n\n\n\n

There are five main categories that make up your score:<\/p>\n\n\n\n