written by | April 27, 2022

What Is a FICO Score?

A FICO score is a three-digit figure that ranges from 300 to 850 and shows banks and other creditors whether you are inclined to pay your bills on time or not. It not only assists lending institutions in determining the degree of risk you offer as a borrower, but it also allows banking institutions, insurance firms, and other businesses to make quick lending decisions. 

Did you know?

According to Fortune Magazine, billionaire businessman Warren Buffett has a FICO score of merely 718 despite being one of the richest men in the world!  

What is a FICO Score?

A FICO score is a number that measures a user's creditworthiness and was developed by the Fair Isaac Corporation. This value is used by banks, lending companies, and credit card firms to determine your ability to repay the borrowed amount. The FICO score decides whether you will be accepted for a loan, how much you may borrow, and how much interest you will pay. 

Between 300 and 850 is the FICO score range.

Larger credit ratings indicate that you are a more appealing borrower and have a lower credit risk. FICO is among the most well-known credit-rating agencies in the United States. FICO score was released in India to give Indian lending institutions the most accurate consumer credit risk analysis feasible, predicated on creditworthiness from any of the country's main credit agencies. 

What is a Good FICO Score?

Customers with higher scores also have a better chance of getting approved and access to the lower interest rate. The lender or lending institution analysing a user's credit history determines what constitutes a good FICO score. However, lenders normally consider FICO scores above 670 to be good, while scores within 670 and 740 are considered "Good" on the standard FICO scale. 

FICO in India

FICO, a well-known credit-scoring firm in the United States, has released 'FICO Score for India' and FICO Score X Data India, a dynamic data scoring, in collaboration with Lenddo. FICO score and FICO Score X Data are credit scoring systems that enable Indian lending institutions to estimate risk more accurately. 

As per a survey by the World Bank, over half of India's working population is either underbanked or financially excluded. FICO's non-traditional credit rating approach could provide Indian lending institutions more leeway to issue a credit to a broader set of previously uncreditworthy customers owing to a lack of credit record, advancing the Modi government's financial inclusiveness initiative. 

FICO's twin rating solution, which combines FICO Score X Data and FICO score, is an improved risk evaluation methodology that considers several risk factors. This allows lenders to boost their favorability ratings and expand their portfolios without raising the risk of default. 

The FICO score is calculated using info from other reputable credit reporting agencies in India. On the other hand, FICO Score X Data India is based on non-traditional data such as a user's digital footprints, cell phone records, and social networks. 

Also Read: Know All About your CIBIL Score and Report

How the FICO Score Works

The three major credit agencies—Experian, Equifax, and TransUnion—collect data and compile it in a borrower's credit report to produce FICO scores. FICO ratings are created using this information and are based on the following broad factors: financial history, balance owed, duration of credit record, credit diversification, and new credit. Nonetheless, based on the FICO score, certain parameters and factors differ somewhat. 

FICO comprises a variety of industry-specific variants, notably for mortgages and auto financing, in addition to its standard scores (FICO Score 8 or FICO Score 9). Despite FICO score 8 being the most generally employed version, FICO auto scores are utilised in most automotive financing cases, while FICO scores 2, 4, and 5 are commonly used in housing loans. 

What Impacts Your FICO Score 

FICO scores are derived using five key elements, each of which has its merit. Here's how your FICO score is affected. 

Payment History (35%) 

Payment history is the most important factor in determining your credit score, contributing about 35% of the total. This measure considers a variety of indicators, such as the quantity and seriousness of delayed payment and the prevalence of negative official records such as litigation and bankruptcies. Make regular, on-time repayments on every one of your accounts to increase or maintain your credit score. 

Amounts Owed (30%) 

The excellent balances on every one of your accounts (how much amount you owe) are represented in the amounts owing component. It contributes about 30% of your credit score's evaluation as the second essential factor. As a result, paying more than the minimum payment and paying off debts quickly will help you enhance your creditworthiness. 

Length of Credit History (15%) 

The lengthier your credit record, the stronger your credit score will be. Even though the duration of your credit record only contributes about 15% of your credit score, it may be a difficult measure to regulate, especially if you're just getting started with credit. Although you can't travel back in time and create credit reports earlier, you may improve your credit score by keeping your oldest accounts active and in working order. 

Credit Mix (10%) 

The mixture of institutions on your credit bureau, comprising both revolving facilities of credit and instalment mortgages, is known as a credit mix. You may improve this section of your credit record by analysing your credit history and detecting any voids in credit categories. Consider taking out a modest personal loan and ensuring on-time repayments if you only possess rolling credit lines, such as credit cards. 

New Credit (10%) 

Bureaus also consider the age of your new credit while determining your score. If you have multiple newly created accounts on your credit record, your credit score will suffer, and lenders will be more inclined to perceive you as a riskier applicant. This element, like credit mix, only contributes to 10% of the score calculation, and it's something you might influence—especially if you intend to file for a car loan or a mortgage soon. 

FICO Score Range

FICO credit scores vary from 300 to 850 and are divided into five groups based on the probability of a client settling debts and the level of risk he carries to lending institutions. The 5 FICO credit score categories are as follows: 

Poor (less than 580)

Underneath the FICO scoring mechanism, a score of less than 580 is considered below the median and is labelled as Poor. Individuals with credit ratings in this bracket are thought to be high-risk borrowers. 

Fair (580 to 669)

On the FICO rating, scores within 580 to 669 are deemed Fair, which is still below average. Many lenders will approve applicants with a FICO score inside this bracket, but they will likely not be provided attractive conditions. 

Good (670 to 739)

Good FICO scores are equal to or better than the national median. As a result, most lending institutions are prepared to give money to borrowers within this category. 

Very Good (740 to 799)

The spectrum of a Very Good FICO score ranges from 740 to 799. Since this level is well above average, it suggests to creditors that the borrower is a low-risk borrower who is likely to repay their debts on time. 

Also Read: Learn about Credit Score and Loan Basics

Exceptional (800 to 850)

Individuals with a FICO score of 800 or higher are classified as exceptional. These applicants are not only more inclined to get accepted, but they often receive access to the best pricing as well as other lending rates. 

How to Check Your FICO Score?

Acknowledging your FICO score may assist you in gaining control of your money and preparing for a loan or a credit card application procedure. There are several ways of determining your credit score, fortunately, and begin by analysing your credit card bills and the website of your credit card issuer. Many providers provide free FICO ratings on a monthly basis, and some even provide the feature to non-cardholders. 

You may also go to FICO's homepage and sign up for one of three monthly subscriptions that include FICO scores, credit reports, identification monitoring, and other features. 

Conclusion

Establishing lines of credit, using them in limited or regulated amounts, and paying them off swiftly are the keys to a strong FICO score. A solid credit score is vital, particularly for people who want to take out large loans like a car loan or a home loan. 
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FAQs

Q: How is FICO different from credit score?

Ans:

The terms "credit score" and "FICO score" relate to almost the same idea. A credit scoring model known as a FICO score is a credit rating system. While various reporting organisations weigh elements differentially, they evaluate the same factor.

Q: Is 687 a good credit score?

Ans:

A FICO score of 687 is in the good range of scores, ranging from 670 to 739.

Q: Why is FICO important?

Ans:

A FICO score is a three-digit score calculated using data from your credit scores. It aids lenders in determining your likelihood of repaying a loan, which impacts how much you can borrow, how soon you have to pay that back, or how much it would cost.

Q: What are the 5 components of a FICO score?

Ans:

Your FICO credit score is based on five variables: your payment history, the amount of debt you have compared to credit available, the duration of time you've had credit accounts, the mix of various forms of credit you hold, and your desire for additional credit.

Q: What is a FICO score in simple words?

Ans:

A FICO score is a three-digit number between 300 and 850. Creditors analyse credit risk and decide whether or not to offer credit based on clients' FICO scores and other information on their credit history.

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