What Does Your FICO Credit Score Really Mean?

what does fico score mean

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The use of credit in America began in the 1920s, as individual stores allowed customers to make purchases without requiring money upfront.

In the past 100 years, credit has become a lifeline for the American consumer when it comes to borrowing money and extending purchasing power. Your credit score is what shows lenders that you are trustworthy, and is what opens the door to mortgages, credit cards, and other loans.

But beyond the basics, do you know what your score actually means? How do those three numbers inform lenders that you are responsible?

Understanding why your credit score matters and what it means can help improve your overall financial situation while opening up access to more opportunities and savings. Plus, once you understand your score, you can start taking steps to improve it.

A Brief History Of The FICO Credit Score

When you’re trying to get financing and lenders look at your credit score, most of the time they are looking for your FICO score. There are several metrics for measuring credit, but the FICO credit bureau risk score –established by Fair, Isaac, and Company in 1989 – is by far the predominant model for estimating consumer reliability.

What makes the FICO score so important is that it compiles data from the three major credit bureaus in the United States: TransUnion, Experian, and Equifax. Credit card issuers, mortgage and auto lenders, and others report your balances and activity to the three credit bureaus. This information is then analyzed to determine how much more credit you could reasonably take on, and how responsible you’ve been with credit issued in the past.

Why Your FICO Score Matters

FICO credit score
Your credit score reflects the accounts you have opened that report to the big three credit bureaus.

In the simplest sense, your FICO score matters most for obtaining any sort of financing. However, it’s not just creditors that will look at your score. Insurance companies will want to make sure you can pay your policy requirements, and depending on the type of insurance, will want to see whether you are fiscally responsible. Employers may request your credit report – although they cannot receive your credit score or any identifying account information – if you are applying for a high-risk job, a job in security, or a job where you will be responsible for the organization’s money.

What Does Your Credit Score Mean?

Basic FICO credit scores typically range between 300 and 850, and the higher your number, the better.

FICO scores are made up of metrics based on different areas of your past and present borrowing behavior. FICO pulls your information from your credit report, and then weights each metric with different importance:

Payment history: 35%

How often do you pay on time, and what is your history of late payments?

Total debt: 30%

Can you take on more debt from a new lender, or will it increase the risk that you may have trouble paying?

Length of your credit history: 15%

FICO scores will look at how old your accounts are to show lenders that you’ve been establishing a history of prudent borrowing activity and repayment.

New credit opened: 10%

Did you just open a lot of new accounts in a short period of time? Lenders may be concerned that you are a higher risk.

Types of credit: 10%

The different types of accounts you hold are also considered in your score, including store cards, credit cards, mortgages, and others.
In order to verify the information that factors into calculating your score, it’s important to check your credit report at least once a year. The Fair Credit Reporting Act (FCRA) mandates that each of the three major bureaus give you a free copy of your credit report once a year. Check yours for any errors, and make sure lenders are reporting your information correctly. You’ll also be able to see what it is that lenders see when they look at your credit profile, which can help you take steps to improve.

A great strategy for getting into the habit of monitoring your credit information is to order your free credit report from each bureau at different times of the year. For example, order Equifax in January, TransUnion in May, and Experian in September and you have a year’s worth of credit monitoring, completely free.

How Your Credit Score Can Impact Your Life

Your credit score is what allows you to borrow funds, but a good credit score can also positively impact your overall financial situation.

To use a mortgage as an example, if you obtained your loan when your credit score was okay – say between 650 and 700 – you likely didn’t get preferential interest rates and terms. However, if you’ve since improved your credit score to between 750 and 800, you could refinance your mortgage and end up saving thousands of dollars in interest because of that better score.

FICO credit score
The better your credit score, the more money you’ll save due to preferential rates and terms.

Unfortunately, a poor credit score will end up costing you more money in additional security requirements for loans, higher rates, and may even prevent you from obtaining new credit until you take steps to improve.

Ready To Improve? Easy Tips To Start Fixing Your Credit Score Now

Raising your credit score can be done with some regular diligence on your part, but it will take a commitment. You don’t have to spend money or resources on Credit Repair when you’re always mindful of how you’re treating any debts you owe.

1. ALWAYS Pay Your Bills On Time 

The most important factor when measuring your credit score is your payment history, so be sure that you never make a late or missed payment. Set up automatic bill pay and reminders for yourself, and always verify that payments have been processed and received.

2. Pay Off High Card Balances

The second most important measurement of your FICO credit score is how much of your credit you are using, or how much debt you currently hold. When you’re carrying a credit card balance that is perilously close to your credit card limit, you’re using up a significant amount of your credit. Instead, aim to reduce your credit card balance to leave as much distance as possible between what you owe and your overall limit.

3. Request A Credit Line Increase

Another way to quickly adjust your debt-to-credit-limit ratio is to request a credit limit increase from your card issuer. However, you should only do this if you are not planning to increase your spending on that card, and if you can pay off your balance every month. Getting into trouble with a higher credit limit won‘t help improve your scores or finances in the long run.
Good credit is a necessity if you want to obtain a mortgage or other loan, and it can save you money in the long run on interest and preferential rates. Access the things in life that you want, without paying a premium because of a lower credit score.

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