Define FICO Score

FICO scores are credit scores computed using a scoring algorithm developed by the Fair Isaac Corp. Fair Isaac licenses this algorithm to credit bureaus, such as Experian, Equifax and TransUnion, who use it to generate credit scores based on the information they have on your credit history. Having a good FICO score is very important when you apply for loans, because lenders use it to make determinations on whom to lend money to and how much interest to charge them.

Function

Any time you apply for, open, or use a credit account or trade line, your financial institution reports your activity to the credit bureaus. The credit bureaus then build a file based on the information reported to them about your use of debt and how well you pay your bills as agreed.

As more information is compiled about your use of credit, the credit bureau uses the FICO algorithm to calculate your credit score, which is then sold to lenders who want to know how you've managed your debt in the past.

However, not every financial institution reports to every credit bureau. Therefore, your credit score can vary slightly at different credit bureaus.

Features

Different aspects of your credit history are weighted differently when calculating your credit history. Your payment history, which includes your on-time payments as well as late payments and defaults, counts for 35 percent of your score. The amounts that you owe, which also considers the percentage of your available credit that you are using, accounts for 30 percent. The amount of time you've been using credit totals 15 percent; the longer the better. The types of credit you've used, such as credit cards, installment loans and mortgages, accounts for 10 percent. The final 10 percent is based on the number of inquiries on your credit report.

Score Range

FICO scores range from 300 to 850. The higher your FICO score, the more creditworthy a borrower you are perceived to be. According to Kiplinger, the median FICO score is 723. Only about 13 percent of people have credit scores over 800, and only about 14 percent have scores below 600.

Time Frame

The amount of time that information remains on your credit report varies based on the type of information. Most information, such as payment histories, defaults and foreclosures, remains on your credit report for seven years. Inquires remain for just two years. Chapter Seven bankruptcies remain for 10 years. However, newer information is weighed more heavily than older records.

Significance

Many lenders rely on your FICO credit score as a major part of your application for credit. According to BankRate.com, to qualify for the lowest interest rates on mortgages, you need a credit score of 760 or higher. If you have a credit score below 620, you will be classified as a subprime borrower, which leads to much higher interest rates--assuming you are approved for a loan at all.