FICO Scores & What They Mean

Many consumers do not have a clear idea of what FICO scores are, what they mean and how they can affect real-life circumstances. The FICO score is determined by a mathematical formula, and there is a direct correlation between your score and your ability to secure preferred loans or home mortgages. You should understand what FICO scores mean to identify ways to start making your score work to your financial advantage.

Background

FICO stands for the Fair Isaac Corporation credit scoring model, a software program that compiles your financial information and credit background to calculate a three-digit number that is considered your credit score. Consumers' credit scores are issued from three credit reporting agencies: Experian, TransUnion and Equifax. These numbers may differ depending on the information used by each agency to formulate the credit score.

Composition

FICO scores are based on several factors, with each given a certain amount of weight: Thirty-five percent of your credit score reflects payment history, including missed payments, late payments and number of accounts paid as agreed, according to MyFICO.com. The amount owed makes up 30 percent of your credit score, and 15 percent of your score relates to the length of your credit history (generally, the longer the better). FICO scores take new credit into account, affecting 10 percent of the score. Types of credit used account for another 10 percent, and, in general, long-term accounts, including student loans and home mortgages, have a more favorable impact on your credit score than revolving accounts, such as credit cards.

Uses

In 2011, most lenders use FICO scores instead of other credit scoring models when assessing the riskiness of making a loan to a consumer. Car companies may view credit scores to determine interest rates for auto loans, and banks may view credit scores to determine interest rates for home loans. Landlords use credit scores to determine the likelihood that a potential tenant will pay rent on time. In some cases, employers use credit scores to evaluate a potential employee's ability to manage money and finances.

Score Range

FICO scores over 700 are considered to be excellent, possibly qualifying consumers for preferred interest rates on loans, according to Bad Credit Advisor. Scores ranging from 600 to 699 are still considered good, and FICO scores ranging from 600 to 679 are considered acceptable. Low FICO scores range from 580 to 619, resulting in higher interest rates and lower credit card limits in some instances. Poor FICO scores range from 500 to 580, and it may be more difficult for these consumers to secure credit. Scores below 500 act as a red-flag to lenders that consumers may struggle to manage credit. A credit score is not the only criterion lenders consider when determining whether to issue a loan, so a low or high FICO score does not guarantee anything. However, it often is a major factor.

Improving Your FICO Score

Consumers wanting to improve FICO scores can take a number of actions. Making on-time payments each month and paying over the minimum required payment when possible will help. You should avoid opening new credit accounts unless necessary, and you should keep billing addresses current to avoid missing bills or account statements.