Fico score

Definition

A FICO score is a three-digit number that represents a consumer's creditworthiness, calculated based on their credit history and financial behavior. It helps lenders assess the risk of lending money or extending credit to an individual. The score typically ranges from 300 to 850, with higher scores indicating lower risk to lenders and potentially leading to better loan terms and interest rates.

5 Must Know Facts For Your Next Test

1. FICO scores are calculated using five key factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).
2. Lenders use FICO scores to make decisions on credit applications, affecting whether someone is approved for a loan and what interest rate they receive.
3. A FICO score of 700 or above is generally considered good, while a score below 600 may indicate higher risk to lenders.
4. Consumers can improve their FICO scores by making timely payments, reducing debt levels, and avoiding new hard inquiries into their credit.
5. FICO scores can vary among different scoring models and credit bureaus, so it’s important for consumers to check their scores from multiple sources.

Review Questions

• How does payment history influence an individual's FICO score, and why is it considered the most important factor?
  • Payment history is the most significant factor in calculating a FICO score, making up 35% of the total score. This factor reflects whether an individual has made their payments on time and any instances of late payments or defaults. A strong payment history indicates reliability to lenders, while missed payments can drastically lower the score, making it harder to obtain loans at favorable rates.
• Discuss the impact of credit utilization on a FICO score and how individuals can manage it effectively.
  • Credit utilization, which accounts for 30% of a FICO score, measures how much of a borrower's available credit they are using. Keeping this ratio below 30% is often recommended for maintaining a healthy score. Individuals can manage their utilization effectively by paying down existing balances, requesting higher credit limits, or spreading charges across multiple cards to keep each card's utilization low.
• Evaluate the implications of having a low FICO score for individuals seeking loans or credit, and suggest strategies for improving it over time.
  • Having a low FICO score can severely limit an individual's access to loans or result in higher interest rates, making borrowing more expensive. It may also hinder rental applications or employment opportunities in some sectors. To improve their score over time, individuals should focus on consistently making on-time payments, reducing outstanding debt, disputing any inaccuracies on their credit reports, and avoiding taking on new debt unnecessarily. Building a positive credit history takes time but can lead to significant financial benefits in the long run.

Related terms

Credit report: A detailed report of an individual's credit history, including information on credit accounts, payment history, and outstanding debts.

Credit utilization: The ratio of a borrower's current credit card balances to their total available credit limits, which can impact the FICO score.

Payment history: A record of an individual's payments on credit accounts, which is a significant factor in determining their FICO score.