What Is Your FICO® Score And Why Does It Matter?
Katie Ziraldo7-minute read
October 26, 2021
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*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
Most people know the importance of having good credit – especially for large purchases such as homes or automobiles – but not everyone understands how to build credit, check credit scores, or differentiate between the different types of scores provided by different agencies.
But if you plan to apply for a mortgage, loan, or credit card, it’s important to know how to access your FICO® credit scores and what each score means. In this article, we’ll explore FICO® Scores and what you need to know to be better prepared the next time you apply for financing.
What Is A FICO® Score?
Your FICO® Score can be used to show a lender how reliable you would be in repaying a loan. This three-digit number determined by the information in your credit report can influence how much you can borrow, how long you have to pay the loan back and what your interest rate will be.
FICO® Score Vs. Credit Score
Each of the three main credit bureaus (Experian®, EquifaxTM and TransUnion®) gather and maintain information pertaining to your financial history which is used to generate credit scores. Because lenders might not report to all three, your credit score may vary between bureaus.
So how is a FICO® Score different from other credit scores? While all credit scores are determined using similar criteria, your FICO® Score considers all three of the credit bureaus when calculating your score. And according to MyFICO, 90% of top lenders choose to use FICO® Scores to determine a borrower’s creditworthiness. That means if you want to see what lenders will see, your FICO® report will be significantly more accurate than other scores.
VantageScore® is another popular credit scoring model, although it is used less by lenders and more by borrowers looking for opportunities to improve their credit.
What Is A Good FICO® Score?
Generally, a FICO® Score above 670 – 700 is considered a good credit score, while a score above 800 is considered exceptional. On average, most credit scores fall between 600 – 750, which is considered fair to good. A poor FICO® Score is anything below 580. Remember that the higher your score, the better – as higher scores pose less risk for creditors and ultimately lead to more favorable loan terms.
FICO® Score Range
There is a range of what lenders may consider a good or bad FICO Score®. The scores range from 300 to 850.
FICO® Score Chart
There is a range of what lenders may consider a good or bad FICO® Score. Here is a chart that shows each score’s range and rating.
Types Of FICO® Scores
Contrary to popular belief, everyone actually has multiple FICO® Scores determined using different FICO® scoring models. The most widely used model is FICO® 8, which is commonly used in decisions for auto lending, personal loans and credit cards.
FICO® 9 was released in 2016 and although it is used less regularly than earlier scoring models, it provides a somewhat different perspective due to slight variations in its formula. For example, FICO® 9 places less weight on unpaid medical collection accounts and considers rental history, which can aid borrowers with limited credit history.
The FICO® 10 and FICO®10T models were introduced most recently in 2020. Leveraging trended data that looks at an individual’s credit patterns for the last 24 months or longer, FICO® has commented that these models are designed to be the most predictive yet, anticipating that FICO® 10 and FICO®10T will eventually replace FICO® 8 as the most used scoring models.
How Your FICO® Score Is Calculated
FICO® is a California-based company that tabulates the namesake consumer credit score using five key pieces of credit data to determine your score. The factors that affect the outcome of your score include your payment history, the amount owed on existing accounts, the length of your credit history, any new credit accounts and the types of credit in the mix.
Your payment history is a record of your on-time and late payments and is the most impactful piece of the FICO® equation, making up 35% of your credit score. This is due to the fact that the payment history is the best representation of your reliability as a borrower.
The second-most important factor that affects your credit score is the amount of money you owe to creditors. This makes up 30% of your total score. The amounts owed looks at your credit utilization rate, which is the amount of available credit you’re using. Typically, the closer you are to a zero balance, the higher your score will be.
Length Of Credit History
You should know that 15% of your credit score is influenced by your credit history. The length of credit history, specifically, tracks how long you’ve had your oldest and newest accounts and the average age of all of your accounts together.
Your credit mix refers to how many lines of credit you have and the types of credit they are. Credit cards, retail accounts and mortgage loans are different types of credit. Having multiple types of credit shows a lender that you can manage a variety of debt, which improves your score. Your credit mix makes up 10% of your score.
The final 10% of your FICO® Score looks at the number of new credit accounts you have opened recently. If you submit too many inquiries about new credit cards, your credit score will be damaged – so if you plan to take out a mortgage loan anytime soon, try to refrain from opening new credit accounts, as it will affect your score.
Why Your FICO® Score Matters
Your FICO® Scores are important for a number of reasons. In order to achieve your financial goals, you will likely need support from banks and lenders, and you’ll need a good credit score to buy a house and for other types of loans as well. It’s crucial that you understand the factors that impact your score to keep it moving in a positive direction.
When determining if an applicant qualifies for financing, lenders use the lowest median credit score of all borrowers on the loan as the qualifying credit score. This means that lenders will look at credit scores from all three of the major credit bureaus and use your middle score to qualify you.
So in the case of co-applicants, the lender will use the lowest median credit score of each of your scores. For example, if your spouse’s scores are 560, 590, and 610 and your scores are 670, 700, and 710, the qualifying credit score would be 590. This means it’s important to know where you stand and check your scores frequently so you can work on building or improving your credit as needed.
Checking Your FICO® Score
Wondering how to look at your credit score? Each year, you are entitled to a free copy of your credit report from each of the credit bureaus. You can also access your credit report within 60 days of being denied credit or if you are on welfare, unemployed or your report is inaccurate. But that doesn’t mean you should only check your credit once a year.
Keep in mind that while constantly checking your credit information may negatively impact your credit score, there are reporting tools available that won’t hurt your credit. Many financial institutions offer free access to your credit report if you have an existing account with them, and Rocket HomesSM allows you to monitor your credit by giving you free access to your VantageScore 3.0® credit score and a report from TransUnion® every week.
The Bottom Line
When it comes to financial milestones like buying a home, very few of us can do it alone. If you know you’ll need financial support to take the next step, information is power. It’s important to know where you stand before applying for financing to avoid any surprises down the road, and few factors will affect your ability to qualify more than your FICO® Score.
All credit scores have room for improvement. To be better prepared, read more tips to improve your credit score today!
Rocket HQSM has partnered with CardRatings for our coverage of credit card products. Rocket HQ and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
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How Many Lines Of Credit Should I Have?
When determining how many lines of credit you should have, it’s important to know that there is no formula or magic number. Because the number of credit scores one has can vary from person to person, you should consider your spending habits and ability to manage credit before deciding whether to add another line of credit or not.