Why are FICO credit scores important?

Your credit score is a number that represents your creditworthiness. It is a number calculated from your credit history based on an algorithm to predict how likely it is that you will default on your debt. While your credit score is not the only thing that determines the outcome of your mortgage or auto loan application, it is one of the most crucial factors, if not the most crucial.

A FICO score is a credit score based on an algorithm derived by Fair Isaac Corporation, a business analytic software company. FICO credit scores are the most commonly used in the credit industry. Whether you apply for a credit card, an auto loan, a mortgage, or a personal loan, and whether you apply with Bank of America, US Bank, Discover, or USAA, at least 9 out of 10 times they will use a FICO score to assess your credit.

FICO scores range from 300 to 850. The American population’s median is around 710. A FICO score of at least 760 is considered excellent; someone with this score is in the top one-third of the population in creditworthiness and has an extremely low chance of defaulting, below 1%.

Fair Isaac provides a FICO score breakdown:

-35% payment history

-30% amounts owed

-15% length of credit history

-10% new credit

-10% types of credit used

A FICO score is pulled at the moment the creditor asks FICO for it. It is calculated based on the credit applicant’s credit report at the time. In order to have a high FICO score, you need to have a good credit history, and credit history takes years to build. But there is no way around it: you may think you don’t need credit now, but when you apply for your mortgage in the future it will be too late to start building credit, and this will result in a very high interest rate, or complete turn-down of the application.

Hard work will pay off. Imagine the happiness and satisfaction you’ll get when you buy your dream home without completely burning your paychecks in monthly mortgage payments. You’ll need a high FICO score.

It is never too early to take care of your FICO score. Time is your friend. Start building up your credit now.

-Richard Tran