What is a FICO Score?
Article brought to you by Ollo and authored by Shannon McLay, Personal Finance Expert and Published Author.
You may have seen the term “FICO® score” thrown around and wondered “What does that actually mean?” A FICO Score is a three-digit representation of your “creditworthiness” — or an estimate of how likely you are to repay any money you borrow (like student loans, credit cards, mortgage, etc.).
A higher FICO Score tells a lender that you are more likely to pay off your debts while a lower score indicates that you might have trouble paying the lender back. Base FICO Scores range from a low of 300 to a high of 850 while industry-specific FICO Scores range from 250 to 900.
Your FICO score is updated based on information that is provided to the three major credit bureaus (Equifax, TransUnion and Experian) by lenders and other sources. Each of these bureaus generates a credit report based on this information; and this data is used to calculate your score. You are entitled to receive one free copy of your credit report from each agency once a year through www.AnnualCreditReport.com. It’s a good practice to review these reports to make sure that they are an accurate representation of your activity.
It’s important to note that your FICO Score with each credit bureau could be different based on the information on their file. For example, Experian could have a FICO Score of 700 for you while TransUnion shows a 670 FICO Score. The biggest reasons for the difference is that not all lenders report your information to all of the credit bureaus and not all bureaus update information at the same time.
Why does my credit score matter?
You may think your credit score isn’t that important. In reality? Lenders will use a credit score, such as FICO, in most of their lending decisions. Credit scores are not the only piece of information a lender will use to evaluate you (for example they may also look at your income and your employment) however, your credit scores can represent a large component in the decision-making process. A low credit score could not only limit your access to credit, but it could also cost you a great deal of money. Let’s look at some real life examples of how your FICO Score could affect certain situations.
Buying a Car
John and Susan are both looking to buy a new car. John’s FICO credit score is 750 and Susan’s credit score is 620. Based on John’s FICO Score, the car dealer offers him an interest rate of 3.20%, while the dealer only offers Susan 8.98%. Assuming the same loan amount of $10,000, John’s monthly payment will be $181 while Susan’s will be $207. It will cost Susan $312 more per year to own the car or $1,560 over 5 years. As you can see, your FICO Score can play an important role in your interest rate, which could end up costing you money.
Buying a Home
Let’s take John and Susan again; however, instead of car shopping, they are home shopping. John’s FICO Score of 750 would qualify him for a 30-year mortgage rate of 3.85% while Susan’s FICO Score of 620 would qualify her for a 5.45% mortgage rate. On the same home value of $200,000, John would pay $938 per month and Susan would pay $1,129. It would cost Susan $2,292 more per year for her home and $68,760 more over the 30-year mortgage. Imagine what else you could do with that money?
In these two examples, you can see the potential cost difference between very good and fair FICO Scores; however, for those with lower FICO Scores, access to credit of any kind may be a challenge or may require the individual to put significant cash down to put the lender at ease to loan funds.
In short, your FICO Score matters in a big way and keeping your credit score healthy is an important way to keep your finances in shape.
This article is provided to you solely for education purposes. It is not intended to provide you with any specific legal, investment or financial advice and you should not solely rely upon this in making financial decisions.