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By Transamerica / Apr 30, 2015

The Ins and Outs of Your FICO® Score: Part One in a Three-Part Series

FICO score  blog 1

Do you know what a FICO® score is? More importantly, do you know what your FICO score is? A FICO score can be one of the most significant reflections of your credit when taking out a loan. It gives lenders a good idea about your credit-worthiness.

What is a FICO score?

A FICO score measures your credit risk and provides lenders with a rank that describes how likely you are to pay back a loan. The score was first established in 1956, and then later updated with new algorithms throughout the years. The FICO score provides a fast, comprehensive and fair manner in which a borrower’s credit history can be examined without bias by lenders. Before the FICO score was instituted, the process of applying for credit was often slow, inconsistent, and unfairly biased.

According to myFICO.com, 90% of lenders use FICO scores. Your FICO score can directly affect the amount of money you are qualified to borrow on a loan, as well as the loan’s interest rate. The following shows the five factors that go into a FICO score, and their percentage of importance toward your overall score.

  • Your payment history determines 35% of your score.
  • The amount of money you owe other lenders, as well as how close you are to paying off what you owe, determines 30% of your score.
  • The length of your credit history determines another 15%.
  • Whether you have shown an ability to manage a variety of credit types, such as student, business or car loans, accounts for 10%.
  • If you have recently applied for a loan makes up the final 10% of your score.

Why is a FICO score important?

If you want to take out a loan, such as a mortgage, potential lenders will consider your FICO score as a decision factor in order to determine if they will give you the loan. If your score is on the higher end of the FICO score range, it will be easier for you to obtain credit.

FICO scores have recently been in the news. For the very first time, certain financial institutions have begun to release FICO scores to their customers for free. The reason behind this is due to the Federal Trade Commission’s desire to have Americans treat their credit score as an early warning system against identity theft and fraud. This initiative supports the Fair Credit Reporting Act, which promotes the accuracy, fairness, and privacy of information found in reports issued by the consumer reporting agencies. Financial institutions also hope that providing scores will increase customer awareness of their current score, and prompt them to make changes that will result in improved scores in the future.

Where do FICO scores come from?

FICO scores can be generated from one of three credit reporting bureaus, which are:

  • Equifax
  • TransUnion
  • Experian

Keep in mind these credit reporting bureaus generate their own scores. Nonetheless, the three scores should be somewhat similar.

What determines a good FICO score?

FICO scores range from a low of 300 to 850, which is the highest FICO score you can obtain. Typically with most lenders, the higher your score, the more money you can borrow at a lower interest rate. While lenders consider a person with a FICO score of 720 or higher prime borrowers, where you really want to be with your FICO score is in the 760 to 850 range in order to get the best interest rates possible on your loan.

FICO scores are very important to lenders, so do not take them lightly. Try to keep yours as high as possible in order to get the loan you want.

Now if your FICO score isn’t all that great, there are ways to remedy it. Stay tuned for part two of this series to see how you can repair your FICO score.

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