What’s A FICO® Score?
The FICO® Score was created by the Fair Isaac Corporation (FICO®) and is a three-digit number based on your credit report. Lenders use your FICO® Score to determine loan options based on past credit history.
In effect, from a real estate buyer’s perspective, those financial providers that offer home mortgages to borrowers will look to your FICO® Score alongside other details on your credit reports to weigh credit risk and decide if they’re comfortable extending you credit. The better your FICO® Score, the better your chances of securing a home mortgage – and the better the terms under which these loans will typically be extended.
Fair Isaac Corp. applies a proprietary method to compute your credit score. But generally, your FICO® Score is impacted by the following five factors (each weighted respectively as indicated):
- Payment history (35%): This is looking at how effectively you’ve maintained a track record of timely payments. The more consistently that you make on-time payments, the higher your score will trend. Conversely, the more late payments that you rack up, the lower it will lean. Unpaid balances or accounts that have gone to collections can also negatively impact your score, as can bankruptcies or foreclosures.
- Amounts owed (30%): This category looks at the amount that you owe in total across revolving debts (like credit cards) and installment debts (like personal loans, car loans, and home mortgages). Maintaining lower balances in relation to your overall credit limit can help you maximize chances of notching up a good credit score.
- Length of credit history (15%): The longer your track record of maintaining a credit history, the better for your credit score it tends to be. In effect, the more data lenders have to look at (and the better that this data reflects on your financial habits), the higher your FICO® Score will trend.
- Credit mix (10%): Lenders also like to see that you’ve been able to manage a healthy mix of different revolving and installment credit facilities, which reflects positively on your perceived ability to balance a budget.
- New credit (10%): As it turns out, every time that you apply for a new loan or credit card, your credit score temporarily decreases. However, if you’re diligent about making payments on time, maintaining manageable credit balances, and otherwise making ends meet, your score should quickly recover.
Is FICO® Score The Same As Credit Score?
On the one hand, the terms “credit score” and “FICO® Score” are often used interchangeably. However, be advised: A FICO® Score is just one type of credit score – noting that different scoring providers and methods (for example, VantageScore®, as discussed below) exist.
Most FICO® scores hover within the 300 – 850 range, with tallies above 670 considered a good score. (Although different scoring ranges, like 250 – 900, can be found in other industries such as auto loans and credit cards.)
Financial providers can look to various choices of credit bureau and reporting methods when seeking to compute your credit score. That said, typically, when mortgage lenders are seeking to gauge your creditworthiness, the credit score they’re likeliest to consider is that provided by FICO®.
Having a higher FICO® Score can help increase your chances of obtaining a loan and securing it from a wider pool of potential providers significantly.