FICO Score - Friend or Foe?

One very important element in your overall credit worthiness package is your FICO score. FICO is just another word for your credit score. With an above average FICO, you have access to plenty of capital at reasonable rates. With an average FICO score you’ll likely be able to get a loan for just about anything you need. With a sub-average FICO, you’re basically at the mercy of any lender that you need to borrow from. We all know this, we know our credit score can be a key to opportunity or a hindrance to financial progress, but what exactly is a FICO score and how does it affect your debt management choices?

What is FICO?

FICO is an acronym formed from the letters of its founder, the Fair Isaac Corporation. Its a score between 400 and 800 that ranks credit worthiness according to a proprietary algorithm invented by the company, Fair Isaac, with 400 being the worst and 800 being the best. Other companies now have their own variations, but the basic calculations are similar and you’ll hear FICO and ‘credit score’ used interchangeably throughout the lending and financing process.

How is it calculated?

Though the details of the algorithms are closely held secrets, many people over the last many years have “reverse engineered” several of the important factors, determining the basic pieces that go into the calculation of your FICO score. Any late payments will lower your score, with the quantity and severity of the lateness variably affecting the score, sometimes heavily.

The total amount of debt carried per month is another element. A less important factor is the number of credit cards and credit checks performed. The last note about the number of credit checks performed may cause a double-take but, yes, the number of inquiries into your credit score can affect the score itself. The logic being that the more times you apply for credit (thereby causing inquiries), the more likely it is that you may be in a more precarious financial position. I know, it isn’t always true, but its just another factor that goes into the score. Often times these days, some more common types of credit checks for rental situations, identity verification, etc don’t count against you, but its worth remembering that frequent applications for credit can still hurt your score. Keep this in mind as you work your way out of debt.

What is an average FICO score?

Any score below about 620 is considered marginal and below 580 is considered poor. Scores of 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO (work history, income, expenses, etc) will play a more significant role in loan decisions.

Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important factor for deciding whether to make a loan, and at what interest rate. Other things being equal, the higher your score the better interest rate you can obtain. Some institutions won’t even loan to those with less than average credit or, they will loan, but it will be at exorbitant rates.

Of course, many times all other things are not equal. Prevailing interest rates in general, the current demand for loans, the general economy and other factors have a significant impact on the willingness of lenders to lend and at what rate.

The entire lending industry has undergone at least two significant shifts in the last 20 years. With the increasing use of computers and modern financial techniques, underwriting loans is done very differently today than in the past. Not surprisingly, the Internet has shifted finance to a very different mode of working. The days of having to head down to the local bank with your financial statement and begging for them to loan you money are gone. Websites such as E-Loan and Bank Rate will show you the best rates available and you can fill out loan applications easily online.

Even with all these changes, though - or perhaps because of them - the FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the lender’s ‘ten second’ evaluation when presented with a stack of applications to approve or deny.

Dealing with a bad FICO score

Fortunately for those who have financially slipped, there are alternatives. Though your FICO may be low, you still have several options. The first thing to do is set into motion a plan to improve your score.


As you work to remove those outstanding overdue debts - either through paying them off or negotiating with the lender - your FICO will gradually improve. The age of 30 day past due, 60 day past due (or longer) late payments is a factor in calculating your FICO so you’ll see your score steadily improve over the months as you make payment arrangements and relieve your old debts.

At the same time, you can shop around for lenders willing to take a higher risk by lending you money, there are some very interesting options out there these days for troubled borrowers that simply weren’t around even 5 years ago. Head over to My Two Cents to check out the article on Prosper.com. The downside is those loans almost always carry a higher interest rate. Your best approach is to try to forego borrowing for as long as possible while you work to improve your debt situation. Your FICO will follow suit. If you don’t know your FICO score or how to obtain it, check out my earlier post to find out how to obtain a free credit report and what you can expect when you receive your copy.