Fair Isaac Corporation developed the now commonly used methodology for credit scoring in the 1950s. Your FICO score is calculated based on five data points: payment history, amount of debt, length of credit history, new credit and credit mix. The FICO score is used primarily by lenders to determine whether borrowers are likely to pay back the funds loaned to them.
The FICO score range is between 300 and 850. Generally, low credit scores indicate individuals are more of a credit risk, whereas high scores imply people are likely more responsible with their finances. A score of at least 700 will normally put you in the “good” credit category. Keep reading to find out what your FICO score means for your finances.
How to Check Your FICO Credit Score
There is no need to pay to find out your credit score, as many credit cards help you get a free FICO credit score. Citibank, JPMorgan Chase & Co. and Discover are a few of the companies that offer this as a perk on certain credit cards.
If you cannot get your free credit score through your credit card provider, you can obtain one free credit report per year from the three major credit bureaus: Equifax, Experian and TransUnion.
Related: What Is a Good Credit Score?
5 Times Your Free FICO Score Matters
Although cash is said to be king, credit is needed for a variety of things — not just for making large purchases. Here are five important life moments that your FICO score affects:
- Buying a cell phone: When you buy a cell phone, you are typically asked to sign a contract. The contract obligates you to continue with that company’s services for a certain period. Before the cell phone provider will agree to sell you the phone, they will run a credit check to ensure you are likely to pay the upfront and monthly charges.
- Obtaining a credit card: Using your credit card responsibly is one way to increase your FICO credit score, but you need some credit to be approved for the credit card in the first place. You might find a company willing to administer a card with a low limit initially, and then you can pay off your balance in full to build your credit history. In the long term, it is better to focus on getting a good credit score, which will lead to credit card offers with lower interest rates and higher limits.
- Getting a job: Some employers opt to run a credit check on candidates they feel might be a good fit for a job. Higher credit scores show the applicant tends to be responsible, whereas lower scores might leave the employer with concerns about hiring.
- Renting or purchasing a home: Landlords typically check your credit score to determine whether you are likely to make monthly rent payments on time. Mortgage companies use the score before approving a home loan, home equity loan or refinance and before determining the mortgage rate to offer.
- Leasing or buying a car: Whether you lease or purchase a car, the dealership will check with a credit bureau to find out your FICO score. Some dealerships are willing to work with individuals who have lower scores, but these individuals will pay higher interest rates that will cost more in the long run.
MyFICO reports that 90 percent of lenders use your credit score to determine your creditworthiness, which is the degree to which you are likely to pay off a loan. That statistic reflects how important it is to understand and improve your credit score.