It’s important to understand exactly what a FICO score means when you are considering taking a loan or seeking any other form of financing. By reading this post, you’ll find out the importance of a FICO score, its benefits and ways to increase your credit score range.
Then, when you’re ready to apply for a loan, you’ll have all the answers to move forward confidently. This said, keep in mind that Camino Financial doesn’t require a minimum credit score for borrowers to qualify for a business loan. It’s one of many ways we stand behind our motto, “No Business Left Behind” since we have fewer requirements than most lenders.
What is a FICO score?
FICO stands for Fair Isaac Corporation. Bill and Earl Isaac founded this company which established a credit score model. The FICO score is a number that ranges from 300 to 850 and represents how creditworthy you are to potential lenders as shown in the graph below. Most people also refer to the FICO score as simply “credit score”.
At first sight, you can see the importance of having the highest FICO score possible. It opens the door to financial possibilities that are otherwise unattainable.
Why are there different types of FICO scores?
Experian, Equifax, and TransUnion, the three main credit bureaus in the US, use three different algorithms to calculate your FICO score. However, the credit bureaus base their findings on similar data: payment history, how you use credit, the number of years in business, and how often you submit credit applications.
These multiple versions of credit scores help lenders make more informed decisions when extending credit for loans. FICO score models are updated periodically to benefit both borrowers and lenders. Just so you are aware, there are industry-specific FICO scores that are similar to regular FICO scores but differ based on perceived risks per industry.
Why is your FICO score so important?
A solid FICO score positions you to borrow money from lenders, get better deals with suppliers, or more favorable insurance premiums, to name a few. A solid credit score is like having a golden key to open doors to financial opportunities beyond the ability to borrow money, that stay closed otherwise. Please refer to this article to check for yourself the many benefits that an optimum FICO score can provide you.
Why is your FICO score a key factor when applying for a loan?
Unlike Camino Financial, other lenders require that your FICO score is within a specific range. They see your score as a litmus test representing whether you can repay a loan. To put your FICO score into a clearer perspective, the interest rate and score are closely connected. If your score is low, your interest rate is high and vice versa. The interest rate you qualify for can mean the difference between hundreds or thousands of dollars.
It’s pretty clear that your FICO score is a key component to getting a competitive interest rate. Let’s see what specific factors affect the score so you can get a better grasp on how to improve yours.
What affects your FICO score?
- Payment history: If you routinely miss credit card and other types of payments to creditors, it reflects your payment habits (not in a good way).
- Current debts: Having too many debts can negatively affect your FICO score. Your credit utilization ratio lets lenders know if you max out your credit limits by routinely incurring new debt.
- Credit history: Every time you buy something on credit, you create a trail of transactions. The three credit bureaus mentioned earlier keep these credit histories on file which are accessible for viewing by creditors.
- Credit applications: You’re considered a greater credit risk when you open new credit applications frequently.
- Types of credit used: Your current creditors may include mortgages, installment loans, credit cards, and store accounts.
The pie chart below shows the maximum usage percentage for areas that affect your credit score.
How do I find out what my FICO score is?
Checking your credit score isn’t hard at all. In fact, you can use a free service like Credit Karma to pull up the three scores from the credit bureaus. You’ll just need to provide your email address, your basic personal information, and the last 4 digits of your social security number. Credit Karma also recommends the best credit cards for your profile, offers ways to manage your finances, and posts user reviews on financial products.
Ideally, you should check your credit report regularly when trying to build or improve your FICO score. Have always in mind that a poor credit score limits your chances of qualifying for a loan, buying a home, or even purchasing supplies for your business.
How can you build or improve your FICO score?
Now that you know the importance of having a good FICO score, here are a few tips to increase it.
- Never have late bills: If you fall behind on rent, utilities, and other bills, you readily establish an unfavorable credit history. Make a decision to never let that happen.
- Open a checking account: Starting at rock bottom is daunting when you’ve never established credit. Opening a checking or savings account won’t build credit. What it will do is create a history of transactions reflecting how well you handle money. Your banking institution can refer to those accounts to decide whether to offer you a loan (which does build credit when you make timely payments).
- Use your credit cards wisely: Used wisely, credit cards can be a great way to build your credit score, but you have to make sure your credit card bills don’t exceed the amount you can afford to pay. Never let your balance exceed the 30% credit limit on your card. When your balance is more than 30% of your credit limit, it will affect your credit score. Refer to this article to learn the right way to use your credit cards to build your FICO score.
- Buy your favorite gadgets: Nearly everyone wants a smartphone or entertainment system. Purchase electronic items like these using the store credit. It’s also important to follow up with the retailer to make sure they report your payments to a credit bureau.
For more tips, check out this article on How to Improve Your Credit score. You can implement all 15 tips or just a few to make a positive impact on your FICO score.
Other FAQs about FICO score
If after reading all the above you still have questions, you may find your answers below:
- Is a FICO score the same as acredit score? Yes, it is. “FICO score” is, let’s say, the technical name.
- What is a normal FICO score? Currently, the average FICO score in the US is 695. If you check the chart above, you’ll see that’s a good score, but not excellent.
- Is Credit Karma your FICO score? Yes. Check the section on Credit Karma above to learn how to use this online tool.
Camino Financial can help you improve financial performance
Along with helping you gain financial independence, Camino Financial provides you with educational tools and resources to keep you a step ahead and access better financial opportunities. We offer articles like the ones mentioned in this post or this related one about 6 harmful habits that negatively affect your credit score.
At the end of the day, our goal is to help you build credit and experience success, like Rafael and María, the owners of an auto shop, who increased their FICO score through timely payments towards their business loan. After repaying their first business loan, they applied for another loan to pay off outstanding credit cards used to fund the business. After two weeks, María’s credit score increased by 50 points, and Rafael’s increased by 59 points. Because the couple never missed a payment, Camino Financial reduced the annual rate of the second loan and extended the payoff term. With Camino, they not only received the funds to make significant upgrades in their business, but they found a trustworthy partner that has helped them improve their financial welfare.
You can celebrate achievements too when you become a member with us. After getting a loan, we report your monthly loan payments to Experian, so you continue building your credit. Also, as your credit grows, you’ll be able to graduate to a better loan for a larger amount and at a lower interest rate.
Remember that while we don’t require a minimum FICO score to approve your application, the higher your score is, the lower your interest rate will be! If you are ready to take the first step to grow your business, simply request a quote for a business loan. This simple application won’t affect your credit and you’ll know instantly if you prequalify for one of our business loans.
A good FICO score enables you to secure funding while paving the way to better days ahead. We’re here to help you make that happen!