FICO Score Facts

Knowledge is power, and in times of economic turmoil, this sentiment becomes truer than ever. Knowing how future lenders view you is important. Even more important is determining the formula that can gain you the highest FICO score. The higher your FICO score, the better for you when you want to take out a loan, apply for a credit card, a mortgage, an apartment or even a job. Once you understand some facts about FICO, you have taken the first step in gaining some power and possibly raising your score.

Fair Isaac Corp.

The Fair Isaac Corp. developed the FICO scoring system for the credit-reporting agencies to rank consumers. Your FICO score is a three-digit number that provides a quick and easy way to determine whether you'd be a good risk to lend money to. If you have a high FICO score, you'll have credit available to you at a low interest rate. If you have a low FICO score, you may not be able to obtain a loan at all, or if you can, you'll pay a high rate of interest. Being assigned a number may rub some people the wrong way, but having a FICO score is actually better for you than having no scoring system at all. Prior to FICO, lenders could make judgment calls that were oftentimes unfair. FICO is objective.

Score Range

Financial setbacks, such as a repossession or late payments, can lower your FICO score in a hurry. You can improve your score, but raising your score typically takes more time than lowering it does. FICO scores range from 300 to 850. No magic cutoff exists to determine whether you get a loan or the best interest rate, but there are guidelines many lenders follow. For example, if your score is higher than 660, lenders are likely to view you as having an acceptable credit reputation, according to Bankrate. If your score is lower than 620, you are considered a high risk. Typically, if you reach 760 or more, you can expect to receive the best rates on loans.

The Five Factors

Five factors determine your FICO credit score, and they are weighted differently. The single most important factor in your FICO score is your payment history -- whether you pay back the money you borrow on time. This makes up 35 percent of your score and is the first thing a lender wants to know. Payment history refers to credit cards, installment loans (such as car loans) and mortgage loans. If you have a bankruptcy or a collection item on your report, that is also in this category. How much you owe accounts for 30 percent of your score. Even if you pay all your bills on time, if you are maxed out on your credit, that lowers your score. It's better to keep your credit usage at 20 percent to 30 percent, recommends David Chung, a Maryland credit expert, on Bankrate. How long you've had a credit history makes up 15 percent of your score. Generally, the longer you've had credit, the better it looks to lenders. Therefore, it's best not to close your old credit card you don't use anymore. Keep it open and use it every couple of years, even if you just charge $10, and pay it off right away. New credit makes up 10 percent of your score. So, if you intend to apply for a big loan, such as a mortgage, it's better not to apply for a lot of new credit just prior to the mortgage application. The final 10 percent of your score are the types of credit you have. Lenders like to see a healthy mix of credit--credit cards and installment loans--to see whether you have experience with different types of loans.

Your Credit Report

You can get a free copy of your credit report once every 12 months from each of the three major credit-reporting agencies--Equifax, Experian and TransUnion--by contacting AnnualCreditReport.com. It's important to do this because credit reports can contain mistakes that could lower your credit score. If you find a mistake, write to the credit-reporting agency with proof of the error and request the mistake be fixed. You won't be able to see your actual FICO score for free; you have to pay extra for that, usually $15 as of 2011.