4 Ways Your FICO Scores Affect Your Financial Life

Before you go and apply for credit, it’s important to understand where your credit stands.

Knowing your FICO® Score is helpful because it's how lenders will determine whether to offer you a loan. It also impacts your wallet in other ways and can save you — or cost you — hundreds of dollars a year, if not more. In a lot of ways, your FICO Score is a lot like a grade on how well you manage money. 

Here’s what you need to know about FICO Scores.

What is a FICO® Score?

There are many types of credit scores out in the market today, but the most widely adopted is the FICO Score. If you’ve applied for credit in the past, it’s very likely your lender pulled your score from FICO. 

FICO (formerly Fair, Isaac and Company) is an analytics company and uses data, like your credit history, to make predictions. Their FICO Score is a type of credit score used by lending institutions to make decisions like whether to extend credit to you and if so, at what interest rate. (But more on that below). The credit scores are three digits and typically range from 300 to 850. The higher the number, the better your credit.

Although FICO has dominated the credit industry, there are others (like VantageScore) in the market that are used by lenders, too. Those scores will be different since they’ll use their own proprietary technology and analytics to make their predictions about your credit.

Which FICO Scores do lenders use?

It’s also important to know that while FICO scores are used by 90% of the top lenders, lenders use different versions of FICO scores depending on the type of financing you plan to secure (a mortgage versus an auto loan, for example). 

FICO Score 8 is still the most widely used version. But FICO Score 9 is gaining traction and includes a more nuanced treatment of medical collection accounts.

How do lenders use FICO Scores?

When you apply for financing, lenders use your credit reports and your FICO scores — which are based on the data in your credit reports — to determine your creditworthiness.

While your credit reports contain information collected on your track record of handling debt, your FICO scores summarize how likely you are to repay a new debt obligation. This includes:

  • Payment history 
  • Amount owed (Credit utilization rate)
  • Length of credit history
  • New accounts
  • Types of credit (cards, installment loans, etc.)

These credit score factors are not all treated equally when it comes to your credit score. For example, your payment history (35%) and amount owed (30%) holds more weight than new credit (10%), credit mix (10%), and length of credit history (15%). 

Depending on these variables, you can find yourself paying a low-interest rate on a credit card or not qualifying for credit at all.

How your FICO Scores are used in lending decisions

Here are some of the most common scenarios where you will want to know not just your credit score, but your FICO Scores as well.

1. Opening a credit card

You might apply for a credit card to take advantage of a beneficial rewards program or to start building a positive credit history. Many credit card issuers evaluate how much of a credit limit to extend based on your FICO Scores.

2. Financing a car

The average cost of a new car can extend over $36,000. Through financing, you can pay for a car without coming up with such a large sum of money upfront. For this type of transaction, lenders typically use your FICO Auto Score 8 as part of underwriting the car loan.

In addition, the way you manage your credit and your resulting FICO Scores can also impact the cost of your auto insurance (unless you live in California, Hawaii, or Massachusetts). Drivers with bad credit pay over $1,000 more per year than drivers with good credit.

3. Refinancing student loans

One effective way to tackle student loan debt is to lower the total cost of the loans by refinancing with a new lender at a lower interest rate. Lenders who offer student loan refinancing rely, in part, on your FICO Scores to decide whether you are eligible to take advantage of lower interest rates.

4. Purchasing your first home

Buying a home is one of the largest purchases you will likely make that requires financing. Along with a healthy down payment, your FICO Scores from the three nationwide credit bureaus are used by home lenders to determine whether you will be able to secure the lowest interest rate possible.

How to prepare before you apply for credit

A strong credit score is based on a solid history of positive financial habits. The best approach to establish good financial behavior and maintain strong FICO scores is:

  • Pay all your bills and loans on time, every time
  • Reduce your overall debt to credit ratio by paying down debt
  • Use a minimal amount of your revolving credit available
  • Limit unnecessary credit inquiries
  • Resolve errors on your credit reports

Then you will place yourself in the best position possible when seeking credit throughout your financial journey. FICO works with more than 100 financial institutions to provide consumers with access to their credit score that matters through the FICO Score Open Access program. To see if your bank is participating, click here. You can learn more about how your FICO Scores factor into the financing process at www.myFICO.com.

{Updated by Cristy S. Lynch}

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