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You may have heard the term “FICO score” before – whether you have applied for a credit card, a mortgage, or a car loan, the lender most likely said they would check your FICO score. But what is your FICO score? And why does it matter so much to lenders?

A FICO score is a credit score that is the most popular system that creditors and lenders use to understand whether the borrower is responsible with money. The Fair Isaac Corporation (hence – “FICO”) created it. The three-digit score, ranging from 300-850, is calculated using several weighted factors:

35% – Payment history: refers to how timely you are in making credit payments. Any late or missed payments may negatively impact your score.

30% – Credit usage: refers to how much of your total available credit you’re using now. Generally, having more available credit translates to a higher score.

15% – Credit history: refers to the length of time you have utilized credit. Usually, the longer you have utilized credit, the higher the score. However, even individuals with a short credit history can have a high FICO score if the other factors are favorable.

10% – New credit: refers to any recently opened accounts the borrower has. A high number of newly opened accounts in a short period of time may signify a risk to lenders.

10% – Credit mix: refers to the different types of credit you have, such as credit cards, auto loans, and mortgages. Typically, the better mix you have, the higher your score, although you do not need to have one of each.

FICO scores are important because they give lenders a quick and consistent view of your credit history. They can use this information to decide whether to loan you money and the terms of what that loan may be. A good FICO score will make it easier for you to be approved for a credit card, auto loan, or mortgage, so it’s essential to be aware of your score and keep it in good standing. Lenders rely on FICO scores to get an accurate picture of the borrower they are dealing with, and when applying for a loan or credit line, it’s essential to paint the best picture possible.

*DISCLAIMER: this educational article is for informational purposes only. It is highly recommended to consult your financial advisor for financial advice.

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