Understanding Your FICO Score

Considering how critical one’s FICO score is to modern day life, it’s surprising how little people know about what actually makes up this all-important number. We will describe some of these facts in the passages that follow.

First off, FICO scoring ranges from 300 to 850. The higher the score the better your credit worthiness is considered to be by potential lenders. While it is not totally uncommon for consumers to score above 800 it is extremely unlikely someone would have a score in the 300’s. A score in the 500’s is thought to be to be very poor, most often indicating a bankruptcy or other very serious credit missteps.

There are five components to the FICO score:

Payment history, making up 35% of the score

Amount owed, 30%

Length of credit history, 15%

New Credit, 10%

Types of credit used, 10%

What does not factor into your score:

Private information having nothing to do with actual payment history such as race, religion, sex, marital status, age, salary, location of primary residence, child and/or family support or rental payments.

There are actually 3 FICO scores, one for each of the reporting agencies: Experian, Equifax and Trans Union. These scores will vary, although not very much, depending on what information each of the bureaus have on you.

Creditors depend on your FICO scores in judging whether or not to offer credit, the amount to lend, the rate of interest to charge, and the terms of repayment. At the end of the day high FICO score will mean a big savings for the borrower over the life of the loan depending on the loan and terms.

Lets take a look at an example: Person A has a FICO score of 760 and Person B has a score of 640. Each one applies for a mortgage loan of $250,000. Person A will qualify for a loan and an interest rate of 6.36% and a monthly payment of $1,680. Person B would qualify for a loan with an interest rate of 7.95% and a monthly payment of $1,971. Thats a difference of $3,495 per year.
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