What is a FICO Score?

What is a FICO Score?
Date Added: March 28th, 2006

By Chris Stallman  |  E-mail

"I was recently told by a friend that credit scores are important and that my "FICO" score can determine if I get an apartment or not.  Is this true?  And what determines what my score will be?"  - Cayna (Plymouth, MI)

Yes, your friend was entirely correct--your credit score is important and it can help determine if you qualify for an apartment or not.  We'll break this topic down and answer some more specifics about FICO scores and how they're calculated.

A FICO score is a credit score that is calculated by various components in your credit report.  As you might have read in an article that we wrote a while ago, credit reports are like your report card when it comes to managing your credit.  Lenders, such as credit card companies, are the teachers that grade your performance.  All of this is put together into a summary that helps future lenders determine how credit-worthy you are.

While the credit report might be a summary of all of your credit history, lenders don't always want to wade through this information.  Sometimes they just want a quick score that will allow them to make an easy decision about whether or not to lend to you.  This is where the credit score comes in.  The credit score takes all of this data in your credit report and calculates a score from it.  The higher your score, the more likely it is that you'll get more credit and a lower rate.

The FICO score in particular is a score that is calculated by a company called Fair Isaac.  This score is used primarily by mortgage lenders but is also used for a variety of other reasons, including determining if you qualify for an apartment or cell phone.  Fair Isaac reports that it calculates credit scores approximately as follows:

Payment History: 35%

--Are you routinely late?

Amounts Owed: 30%

--How much do you already owe?  Obviously if you owe a lot, you'll have a hard time getting additional credit

Length of Credit History: 15%

--Have you had credit for a long time?  If you just got your first credit card, you'll have a hard time qualifying for a $500,000 mortgage.

New Credit: 10%

--Have you recently applied for new credit?

Type of Credit Used: 10%

--Are you using revolving credit or is it installment loans?  Obviously having high credit card balances looks worse than having student loans or a car loan.

Other Important Factors Not in Your Credit Score

It's important to note that your credit score doesn't say everything about you.  Many lenders will recognize this and look for other sources of information in making their decisions.  For example, while good credit is important for getting an apartment, landlords will also ask about your income and references.  If you have good references (previous landlords), it'll help out.  Also, the income is important because some properties will require that you gross a certain multiple of the rent.  For example, an apartment I was recently looking at requires that your pre-tax monthly income is 4x the monthly rent.  This means that if rent is $700/month, you need to make at least $2,800/month before taxes.

Improving Your Credit Score

Here are a few tips that will hopefully help you improve your credit score over time.  Keep in mind that credit score improvements don't happen overnight, though.

-Always making your monthly payments: This shows companies that you're responsible with your credit.

-Having few credit cards and keeping them for a long time: The longer you have a credit card, the better your score. And the fewer credit cards, the better.

-Carrying low balances or regularly paying them off: Someone who has a $2000 limit on their credit card will improve their credit better than someone with a $500 limit, if they're responsible. But too high of limits can be bad.

Your credit score is one of the most important pieces of your past that will follow you around.  It's important that you work to improve your score if you want to enjoy lower interest rates and easier access to capital.