What Is a FICO Score & Why Is It Important?

Building a credit history and maintaining a high FICO credit score opens the door to various financing opportunities. Credit scores are highly important, and understanding how lenders and creditors use FICO scores may encourage you to improve your score and make wise credit decisions.

What Is a FICO Score?

FICO credit score refers to a three-digit number that creditors and lenders use to determine whether a person is a good candidate for financing. The score is based on information found in an individual's credit report. These scores range from 300 to 850, and having a score 700 or higher is generally a good indication of wise credit habits, says Experian. They are called FICO scores after Fair Isaac Corp., the company that developed the credit scoring model.

Factors that Influence FICO

Knowing the factors that influence a FICO credit score can put you a step closer to improving your present rating. Myfico.com highlights several factors that affect scoring. The two biggest factors are payment history and the amount owed, which impact scores by 35 and 30 percent, respectively. Improving a FICO score undoubtedly calls for paying bills on time and reducing consumer debt. Other factors that are used in determining your credit score include the length of credit history (15 percent), the types of credit accounts held and recent credit applications (10 percent each). For these reasons, keeping older accounts opened, acquiring a mixture of accounts and limiting inquiries can give your FICO credit score a boost.

FICO and Approvals

Having a high FICO credit score, also referred to as maintaining a good credit rating, is important when applying for loans and credit accounts. Applicants with no credit score or a low score are often denied credit due to their higher risk. Quite the contrary, someone with a good credit score and few credit issues (such as collection accounts and late payments) may qualify for easy financing to purchase an automobile, buy a home or acquire another type of loan.

FICO and Interest Rates

In conjunction with determining whether someone can get a credit or loan approval, having a good FICO score influences the interest rate on different loans and credit cards. A score of 700 or higher generally indicates a good history of bill payments. Being a low-risk applicant warrants a lower interest rate; and because lower rates decrease monthly payments, having a good FICO score can increase buying power when financing a house or car.