How Does FICO Affect Your Credit?

Your FICO score is the version of your credit score most frequently utilized by lenders when you apply for a new credit card or loan. Housing agencies, insurance companies and certain employers also review your FICO scores. Each FICO score ranges from 350 to 850, with higher scores being preferable to lower scores. The information on your credit report determines your FICO score. Together, your credit report and your FICO score determine your overall creditworthiness.

Creditworthiness

Your creditworthiness, often referred to simply as your "credit," increases or decreases depending on the amount of risk you present as a borrower. A higher FICO score indicates better credit in general since it denotes positive information on your credit report. A positive credit history demonstrates that you practice responsible debt management and pay your creditors on time. While lenders have no sure way of knowing that you will repay what you borrow, they use your past history to make an educated guess about your reliability.

Consumer Misconceptions

Your FICO score has no impact whatsoever on your credit report. Rather, your credit report determines your FICO score. As the information on your credit report changes, your FICO score also changes. Mostly positive information within your credit file results in a higher FICO score while negative information lowers your rating.

Each individual has three credit reports -- one from each reporting agency -- and, subsequently, three FICO scores. Because the data within each of your credit reports varies, your FICO score from each agency will also differ.

FICO Factors

The exact formula the reporting agencies use to calculate FICO scores is a well-kept industry secret. This prevents consumers from calculating their own FICO scores instead of purchasing them. The basic factors that go into your FICO score, however, are public knowledge and you can use this knowledge as a tool to alter your financial behavior and boost your score.

Your payment history, for example, makes up the largest percentage of your FICO score. Thus, paying creditors on time is crucial for maintaining good credit. Other factors that help determine your FICO score are how much debt you carry, the age of your accounts, and whether your report reflects derogatory entries, such as collection accounts, judgments and bankruptcies.

Credit Considerations

Your FICO score, while important to your overall credit, is not the only factor lenders take into consideration. Your lender wants to see that you have sufficient income to pay off any debts you incur. Some lenders, such as mortgage lenders, will review your actual credit reports in addition to your credit scores to identify any outstanding debts that could hinder your repayment ability.