If you’re thinking about taking out a loan right now, you should consider what lenders will look for in your application. Many issues can cause your loan application to get rejected, and it’s your responsibility as a borrower to be aware of them all.
Applying for a loan isn’t as simple as asking for one and then receiving it instantly. To build your creditworthiness, you must have a strong sense of integrity and prudence. Your FICO score, for example, is a reliable way to judge your reputation as a borrower.
What is a FICO Score?
A lot of people either don’t understand or are overconfident in their knowledge of FICO scores. A FICO score is a three-digit figure that represents the details in your credit report. This score aids lenders in evaluating your capacity to repay a specific type of loan.
Importance of Knowing Your FICO Score
Although your FICO score doesn’t necessarily show all of the information in your credit report, top lenders base their lender decisions on it.
Your FICO score has an impact on how much you can borrow, how long you have to repay it, and the interest rate you have to pay.
Lenders use FICO scores to assess the credit risk of new borrowers. A good FICO score can save you time during application, especially if you need money right now. It can save you a lot of money in fees and interest since lenders are more willing to offer lower rates if you pose a lower risk to them.
FICO Score Vs. Credit Score
You may have come across various credit score reports in the past. These credit scores use a different formula than FICO scores. Other credit scores may appear similar to the FICO score, but the latter is unique because 90% of the top lenders check only FICO scores.
A FICO score is simply one type of credit score. It is developed by Fair Isaac Corporation (FICO), which is one of the major companies that develop specialized scoring models used to generate credit scores. On the other hand, other companies utilize different scoring systems for other types of credit scores.
Lenders began using FICO scores in 1989, and the scoring models have been revised multiple times since then. FICO also provides industry-specific scoring models for various financial services, including vehicle financing, credit cards, and mortgages.
What’s a Good FICO Credit Score?
Every lender sets its own range of a good FICO score. For general reference, below are FICO score ranges and their description.
- Less than 580 (Poor) – This score is significantly lower than the national average, indicating to lenders that you’re a high-risk borrower.
- 580-669 (Fair) – This score is lower than the average for consumers in the United States, yet many financial institutions will approve loans with this score.
- 670-739 (Good) – This score is close to or slightly higher than the national average for customers in the United States, and most lenders consider this to be a good score.
- 740-799 (Very Good) – This score is higher than the national average, indicating to lenders that you’re a reliable borrower.
- 800+ (Exceptional) – This score is significantly higher than the national average, indicating to lenders that you’re an exceptional borrower.
Factors Affecting the FICO Score
Just like any other credit score, your FICO score can fluctuate due to various factors, primarily the borrower’s payment behavior. You have to acknowledge these factors so you can apply measures to protect your FICO credit score.
Debt level
The credit score is determined by the number of loans you have. For example, heavy credit card debts lower your FICO credit score and make it harder for you to get new credit cards and a higher credit limit.
The best thing to do is keep your credit card use at 30% or below, which means that you should only spend up to 30% of each card’s available limit. Individuals with high scores use significantly less than that. Setting balance alerts or making extra payments over the month will help you keep your credit utilization low.
Delayed Payments
FICO’s credit damage data states that one recent late payment might result in a 180-point loss in your FICO score. To avoid loss of points, settle your bills right on time. To avoid missing due dates, use autopay or calendar reminders. You can also ask lenders to reschedule your payments so that they coincide with when you get your salary.
Age of Credit Account
Your credit score will benefit from having an older credit age because it demonstrates that you have a lot of credit experience. Take note that your average credit age can be reduced by registering or terminating old ones.
Final Thoughts
You must be mindful of your FICO score if you’re serious about becoming creditworthy. Take the necessary measures to keep your score acceptable, if not exceptional. You never know when you’ll have a financial emergency; so it’s best to maintain a good FICO score as much as possible.
