The FICO Score

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Now that you’ve found your FICO score, let’s get specific about what that number is and what it means. If you haven’t gotten the number yet, check out the post “The Lifeblood of Personal Finance” and click through the links for that information.

This is from the website myfico.com

What’s in your FICO score? FICO scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages reflect how important each of the categories is in determining your FICO score.

Payment history – 35%

Amounts owed – 30%

Length of credit history – 15%

New credit – 10%

Types of credit used – 10%

These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit very long – the importance of these categories may be somewhat different.

The myfico.com information shows what goes into calculating your FICO score, but how is that three-digit number used and how does it affect your life? Well, the most obvious way the FICO score is used, and thus affects your life, is to determine future risk based on credit report data. For example, say you want a car loan. Once you’ve completed the application, the salesperson will take your information and run a credit check. This check will provide your FICO score. If the score is high enough, you’ll not only be approved for the loan, but you’ll also be approved for the best interest rate available. If your score is average, you’ll likely be approved for the loan, but your interest rate will be higher than if you had a stellar FICO score. And if your score is not very good, you could be denied a loan altogether.

There are other things that are looked at when you are being considered for a loan, such as the amount of debt you can reasonably handle based on your income, your employment history and your credit history. The FICO score is a large part of it, though.

These principles are the same for all sorts of loans, be they mortgages, home equity or personal loans. The bottom line, the lower your FICO score, the more interest you’ll be paying and the higher your monthly payment for that loan will be. The goal: as high a FICO score as possible so you can get the lowest interest rate and thus get to keep more of your money each month.

Okay, so a high score is best, middle score is okay and a low score is bad…but how does that translate to the three-digit number I’m looking at? Well, I wish there was a concrete answer for that, but there’s not. Here is a general guide, however. Credit scores usually fall in a range of 300 – 850. Below is a chart to get a general idea of where your FICO score may fall and what it means.

Credit Score                                 What it Means
760 – 849 Excellent score.    Lenders will likely offer you the best interest rate.
700 – 759 Great score.          It should be no problem to get a loan at a good interest rate.
660 – 699 Good score.          You still should be able to get a loan at a good interest rate.
620 – 659 Fair score.             You should qualify for a loan, but the interest rate will not be the best.
580 – 619 Poor score.            You may qualify for a loan, but the interest rate will be extremely high.
500 – 579 Very poor score.   If you qualify for a loan, the interest rate will be extremely high.

While determining eligibility for credit is a big part of the FICO score, it is also used for other things that affect your life. When applying for jobs, prospective employers may run a credit check. Many employers will do this if the applicant will be working around money or dealing with financial matters, but others may perform the check solely as a way to consider how risky the applicant may be. Additionally, car insurance rates are many times based, partly, on your FICO score. Again, the FICO score is used as a determiner of future risk. That risk can be financial, but insurance companies also use it to determine how much risk a person might take in general. The lower a FICO score, the more likely that person may be to drive fast or more recklessly and, in turn, file more claims.

These uses of the FICO score are definitely controversial.  The matter of whether or not insurance companies should be able to base insurance premiums on an individual’s FICO score has been debated by lawmakers throughout the U.S. The same holds true for the consideration of employment. The bottom line, however, is that the FICO score is part of the consideration process for things not directly related to credit.

That is why it is so vital that personal finance matters, specifically those dealing with your credit reports and score, be taken seriously. The consequences of bad credit can haunt you in ways far beyond just being able to get a good interest rate on your next car loan.

image courtesy of Stuart Miles at freedigitalphotos.net

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