A FICO Score is a three digit number that summarizes how risky it may be to lend money to a person. It is used by many lenders when deciding whether to approve credit cards, car loans, student loans, and mortgages. A higher score can make borrowing easier and may lead to lower interest rates.
For students, understanding this score is an important step toward building strong financial habits early.
Key Facts
- FICO Scores usually range from 300 to 850.
- Payment history is the largest factor: about 35% of a FICO Score.
- Amounts owed, also called credit utilization, is about 30% of a FICO Score.
- Length of credit history is about 15% of a FICO Score.
- Credit mix and new credit each make up about 10% of a FICO Score.
- Credit utilization = credit card balance ÷ credit limit × 100%
Vocabulary
- FICO Score
- A FICO Score is a credit score created by the Fair Isaac Corporation to estimate how likely a borrower is to repay debt on time.
- Credit Report
- A credit report is a record of a person's borrowing and repayment history collected by credit bureaus.
- Payment History
- Payment history shows whether a person has paid credit accounts on time or missed payments.
- Credit Utilization
- Credit utilization is the percentage of available revolving credit that a person is currently using.
- Interest Rate
- An interest rate is the cost of borrowing money, usually shown as a percentage of the loan amount per year.
Common Mistakes to Avoid
- Thinking income directly determines a FICO Score. Income can affect loan approval, but FICO Scores are based on credit behavior such as payments, balances, and account history.
- Maxing out a credit card as long as payments are on time. High credit utilization can lower a score even if the minimum payment is paid every month.
- Closing an old credit card without considering the effect. Closing an older account can reduce available credit and shorten credit history, which may hurt the score.
- Applying for many credit cards in a short time. Multiple hard inquiries and new accounts can signal higher borrowing risk and may lower the score temporarily.
Practice Questions
- 1 A student has a credit card balance of 1,500. Calculate the credit utilization percentage.
- 2 A borrower can get a $10,000 car loan at 8% interest with a lower FICO Score or 5% interest with a higher FICO Score. How much more interest would the 8% loan cost in one year, using simple interest?
- 3 Explain why two students with the same income might have different FICO Scores.