1/31/2023
If you are looking for financing in the United States, such as a personal loan or a credit card, you should already know the importance of the FICO credit score to get money lent to you.
Since it is a tool used by most financial institutions, you need to be clear about its basic aspects and dynamics. This is what we will talk about in this post.
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What is the FICO Score
In principle, the FICO score represents a credit score created by the Fair Isaac Corporation (FICO). Financial institutions and other lenders use this score, in combination with other elements of credit history, to determine a person's degree of risk.
This means that this score will significantly affect the terms of the financing you receive, setting a higher or lower interest rate, and may even result in your application being rejected if your score does not meet the minimum required by the bank.
FICO is an analytical software company dedicated to providing its services and products to those who require them.
In this sense, it has become popular because most banks and financial institutions in the United States use their scores to evaluate if a person has the minimum necessary to not be an investment risk.
What is a good credit score?
As we will see below, this indicator is usually delimited between 300 and 850 points, which are the extremes that indicate who has good or bad creditworthiness.
A good and attractive credit score should be above 670. On the other hand, those who are between 580 and 669 often find it difficult to obtain financing and lower rates.
Credit Score Chart
Below is the table of the different FICO score values:
| Score | Value | Description |
| From 800 to 850 | Excellent | It is the highest score you can have, it means that you are very creditworthy and that you always pay back your loans on time. It gives you access to any type of financing in the United States and with the best conditions. |
| From 740 to 799 | Very good
| Although it is not the highest score, it is also a very high rating that gives you access to practically all the loans and credit cards you want and with very good conditions. |
| From 670 to 749 | Good | It should not be difficult to find financing with this credit score, although the conditions will not be the best and the interest rates will be higher than with a higher score. |
| From 580 to 669 | Regular | With this rating, there are a lot of banks and financial institutions that will not lend you money, and those that do will be at higher interest rates. |
| From 300 to 579 | Bad | Forget about finding good conditions with such a low credit score. Finance companies that offer loans with bad credit apply high interest rates. You can also access secured personal loans offered by many banks, but you will have to provide collateral in the form of a deposit. |
Even if you have a few blemishes on your credit report that you can explain, the truth is that 90% of lenders use the FICO Score to make decisions.
That's why in the mortgage industry there are minimums that must be met, even if you have a few points less. This being so, many experts emphasize taking care of this element to be seen as someone trustworthy.
How the FICO score is calculated
The FICO score is not a random calculation, but a series of elements that make up that value. There are 5 individual categories and each has a corresponding percentage:
- New credits: represents 10% and refers to new accounts you have recently opened. If you have made many applications and opened many of them in a short period of time, this is an alarm signal for financial institutions.
- Credit mix: makes up 10% and refers to the variety of accounts you have. The more product mix you have, the better. In practice, it means contracting credit cards, personal loans, mortgages and other products related to financing.
- Length of credit history: building a good score is a time-consuming task and is a factor that contributes 15% to this score. Much of this depends on how you handle the other categories and the fact that you are just starting out does not imply that you will have a low FICO. The oldest account, the newest account and the overall average are considered.
- Payment history: corresponds to 35% of the score and refers to your payment behavior. If you have paid on time and have not had any problems, this is reflected in your file. The individual credit report shows the payments for each line of credit and details about bankruptcies, late payments, collection by default and other faults.
- Accounts payable: Your level of indebtedness accounts for 30% of your score. Just because you have a lot of debt does not mean you will have a low score. In the FICO calculation, the credit utilization ratio is the key factor. For example, someone who owes $10,000 and has not used the full limit of their credit cards or lines of credit will have a better score than someone who has.
Difference between FICO score and credit score
There are several FICO scores and each of them is designed to predict the probability that someone will miss 3 months of payments in the next 2 years.
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This is done using complex algorithms based on the information that appears in the 3 main bureaus: Equifax, Experian and TransUnion.
As for FICO, the company is constantly updating the score and releases new versions of its scores to work with the different databases out there.
This is also true of VantageScore, which analyzes consumer reports to generate its scores. Although these companies use the same score, their methods may give different results.
More information about credit reports and scores and how to check your report and start your credit history is available on this U.S. Government website.
Other scores offered by FICO
FICO also produces other types of scores based on part or all of what is included in the credit report.
An example of these are insurance and bankruptcy-related credit scores. These are intended to predict the likelihood of when you will file an insurance claim or file for bankruptcy.
English: ¿Qué es el score o puntaje de crédito FICO?