Are you considering taking a loan or seeking any other form of financing?
If so, it’s essential to understand precisely what a FICO score means. 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.
What is a FICO score?
What once was the Fair Isaac Corporation is now called just FICO. 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.
Most people also refer to the FICO score as “credit score.”
But what does your current score says about your ability to repay? Does it affect your ability to apply for a loan or a credit card?
800+ Only 1% of borrowers with this score range become delinquent.
This translates into being approved for loans and receiving better terms.
740-799 Only 2% of borrowers in this range become delinquent.
You will still have a high chance of being approved.
670-739 Only 8% of borrowers in this range become delinquent.
You will most likely be approved for a loan or credit card, but you won’t get as good terms as with a better score.
580-669 28% of borrowers in this range become delinquent.
This will make it very hard for you to be approved. And if you do, the interest rates will be sky-high,
579 or less 61% of borrowers in this range become delinquent.
This means that, most likely, you won’t be approved for a loan or credit card.
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.
A good FICO score enables you to secure funding while paving the way to better days ahead.
Why is your FICO score a crucial factor when applying for a loan?
Lenders 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 intimately 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.
Your FICO score is a crucial 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?
If you routinely miss credit card and other types of payments to creditors, it reflects your payment habits (not in a good way).
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.
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.
You’re considered a higher 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.
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 four 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 payments
If you fall behind on rent, utilities, and other bills, you readily establish an unfavorable credit history. Decide never to 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 a credit 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?
No, Credit Karma is not your credit score, but it’s a platform where you can review it. Check the section on Credit Karma above to learn how to use this online tool.
What is FICO Score 8?
FICO has been around since 1956. But, of course, how we see finance has changed since then. Therefore, the FICO score has been evolving throughout the years. The version used today is the FICO Score 8, which ranges from 300 to 850.
Camino Financial can help you improve financial performance
At the end of the day, our goal is to help you build credit and experience success. With us, you will get the funds to make significant upgrades in your business, but you’ll also find a trustworthy partner that will help you improve your financial welfare.
After getting a Camino Financial 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 more substantial amount and at a lower interest rate.
While we don’t require you to have credit history to approve your application, if you do, 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.