FICO Scores and Why They Matter
, by Rob Kaufman
What is a FICO® Score?
Before deciding how much (or little) a FICO® Score matters to __ you __ , it's good to know what a FICO Score is, what elements make up the FICO Score and how FICO Scores are used.
FICO takes credit information from three of the major credit reporting agencies and uses it to analyze and calculate your FICO® Scores. Due to the fact that the agencies may receive different creditor information at different times (or not at all), you might not have the same FICO Scores at each agency. However, the implication of each FICO Score is the same: it predicts behavior - how likely you are to pay your bills on time and if you are able to handle an increased credit line.
5 elements make up your FICO Scores, each has their own percentage of impact on your FICO Score:
Payment History (35%)
Debt/Amounts Owed (30%)
Length of Credit History (15%)
Credit Mix (10%)
New Credit (10%)
The FICO® Score 8 is the score version most widely used by lenders to make decisions. It will fall into a range of 300 - 850. The higher the Score, the more "credit-worthy" you appear, which means a lender will be more likely to offer you credit. A higher FICO Score can also lead to lower interest rates because the lender has more confidence that you will pay back the loan/credit and it is taking less of a risk.
Why should FICO Scores matter to you?
Are you planning on applying for a mortgage... taking out an auto loan... applying for a credit card? Lenders need to know what kind of risk they're taking if they decide to lend you money. What better way of learning this information than to have a view into your past financial performance? Things lenders like to know include:
Have you paid/are you paying your bills on time?
Have you had any bankruptcies or debt collection problems?
How much money do you currently owe?
Do you have a long, solid credit history or is it only very recent?
What type of credit do you have now - revolving credit? Installment loans?
Have you been applying for new loans a lot lately?
FICO® Scores provide many of the answers to these questions. And since 90% of top lenders use FICO Scores to make their decisions, a FICO Score will likely matter to __ you __ if you're in the market to buy a home, a car or to apply for credit.
As mentioned before, a FICO® Score not only affects a lender's decision to lend (or not to lend), but it also can affect the interest rate you'll be charged. For instance, when you check the myFICO Loan Savings Calculator you'll see the difference in 30-year fixed mortgage interest rates based on FICO Score ranges (as of 10/14/16):
_FICO® Score _ APR
760 - 850 3.179%
700 - 759 3.401%
680 - 699 3.578%
660 - 679 3.792%
640 - 659 4.222%
620 - 639 4.768%
As you probably know, a small increase in the interest rate, even tenths of a percent, can increase interest payments over time by thousands of dollars. This is one of the primary reasons it's so important to keep an eye on your credit reports and FICO® Scores. When it comes time to get a loan, you want to make sure you're getting the amount of credit - and the interest rate - you deserve. And if those things matter to you, then it's looking like your FICO Scores do too.
Now that you know how the score ranges can affect your APR, do you know what your FICO Score range is? Get an estimate using our Free FICO Score Range Estimator.