• Hugh F. Wynn

FICO: Three Digits That Have a Powerful Hold on Your Life

What the heck is a FICO score and why does it have so much sway over your ability to buy furniture, a car, a home, and so on? Who the heck gave it that much power? NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.


Lending Power

Simply stated, a FICO score is a three-digit number based on information gathered by the Fair Isaac Corporation (FICO) that helps lenders determine how likely you are to repay a loan. And it helps folks like you gain (or not) access to the credit you may need to buy higher-ticket. A high FICO score can Save You Money! (an old Mattress Mac refrain) in interest and fees because lenders will extend lower rates to reliable borrowers.


FICO created this important tool currently used in more than 90% of U.S. lender decisions to help determine whether (or not) to issue credit to you based on your financial history. In addition to income, job history, and the type of credit requested, FICO considers length of credit history, payment record, current level of debt, types of credit used, and new credit accounts to arrive at this key credit score.

Breaking Down the Numbers

FICO scores range from 300 to 850. Scores of 670-800+ are considered good to exceptional, meaning you are likely to be approved for credit. Those of you scoring in the 580-669 range may have more difficulty obtaining credit at attractive rates. And a FICO score below 580 can often earn a thumbs down from lenders…most of whom have specific FICO minimums for loan approval.


A good mix of credit accounts and a stellar payment history can enhance your FICO score. It helps to keep credit card balances well below credit card limits. And keep in mind that a history of late payments, “habitual maxing out” of credit card limits, and applying for “too many” cards are financial behavior patterns that don’t lend themselves to achieving high FICO scores.


FICO Category Weights

FICO places different weights on various categories of an individual’s financial history. Generally speaking, the greatest emphasis is placed on the “timeliness” of an individual’s payment history (35%). So, pay those bills on time, folks.


Prompt payment history is followed by the ratio of money you owe to the amount of money available for you to borrow and spend (30%). Of course, owing a lot of money doesn’t necessarily equate to a poor FICO score. Lenders are more concerned about the amount you owe relative to the amount of credit made available to you. In short, just because it’s available, doesn’t mean you have to borrow it…unless you absolutely must.


Also important is the length of your credit history (15%). We’re not talking age here, although it necessarily comes into play. FICO scores in this particular category consider how long an individual’s oldest account has been open, the age of the newest, and an overall average. Generally, the longer a person has maintained good credit, the higher his or her FICO score will be – which makes sense. Still, with high marks in the other categories, even individuals with short credit histories can score high with FICO.


As to the new credit category (10%), the opening of a flurry of new accounts runs the risk of projecting a behavior pattern that can lower your FICO score. Such behavior raises lender concerns.


Last but still important is a borrower’s credit mix (10%). FICO scores are strengthened by a good mix of retail credit accounts, credit cards, installment loans such vehicle or furniture loans, and mortgages. It appears that if you borrow a lot of money from a lot of different types of sources – assuming, of course, a good payment history – you can remain in fine fiddle with most lenders.

In Good Standing

It would appear that eliminating the number of credit cards in your wallet is not a remedy for improving a poor credit score. Certainly, prompt payment is important, but equally important is how much of your available credit is actually borrowed and used each month. Your so-called credit utilization rate is a signal that you are doing a good job of not overspending…an important signal that the credit available to you is being utilized in a way that provides for optimal flexibility in case of a financial calamity.


The longer your credit remains in good standing, the more your credit limit, your utilization rate, and your payment history is supportive of a great FICO score. And the higher your FICO score, the less you will pay to borrow money for future needs.


In sum

It goes without saying that a FICO rating below 580 alerts lenders that you may not be worth the risk as a borrower. So, why not shoot for the stars – that elusive 800+ FICO rating. With that kind of FICO score, lenders will consider you a “worthy” borrower, and over a lifetime, you will save a pot full of money on interest!

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