A lot of people are interchanging the term FICA score with FICO Score. Many people misspell and mix up FICA and FICO. But there’s a big difference between the two. Let me show you.
Firstly, there is no such term as a FICA score. Although FICA does exist, it is the abbreviation for Federal Insurance Contribution Act, it has nothing to do with FICO and credit scores.
FICO, on the other hand, is the abbreviation for Fair, Isaac and Company, the company that first started credit scoring system in 1958 and used widely today to evaluate a borrower’s credit worthiness.
Understanding FICO Score
Now that we’re clear with the confusion between the two. What exactly is a FICO score? What is a Good FICO score?
FICO score is a 3-digit numerical index which represents an estimate of your financial credit worthiness. It is the most important number lenders used to determine who qualifies for a loan, at what interest rate, and to what credit limits.
It is based on a subset of the information in your credit report, typically from the three major American credit bureaus: Equifax, Experian, and TransUnion. Though the scoring system used by all three credit bureaus are different but all point to one conclusion and that is whether or not you have good or bad credit.
Creditors or lenders, such as banks and credit card companies, primarily use FICO scores to determine credit limits and interest rates every time when you apply for new credit card, mortgage, auto loan, personal credit line or any other credit issues by the bank. This scores have proven to be very predictive in assessing the creditworthiness of a person or the likelihood that person will pay his or her debts.
FICO Score Chart
FICO score ranges between 300 to 850. The higher is your credit score is, the lower the risk is to the lenders and the easier you’ll obtain a loan, so to speak. A low score, such as 500, could result in much higher interest rates or having your application rejected outright. Conversely, those with a credit score of 760 – 850 would get the most favorable interest rates.
The following FICO Score Chart may help you to determine where your score is in relation to others.
|Score Scale||Credit Rating|
|760 – 850||Excellent|
|700 – 759||Very Good|
|660 – 699||Good|
|620 – 659||Below Average|
|580 – 619||Poor|
|Below 579||Very Poor|
What’s In FICO Score?
A credit score can be broken down into 5 components, some carry more weight than the others.
Since the bulk of your credit score comes from your payment history and the amount you owe, it’s important to keep a healthy balance and ensure that you always make your payment on time.
What is a Good FICO Score?
If your credit score is on the low side, loans can be tough to obtain and can cost you thousands of dollars in higher interest rates more than they would if you had a decent score. Needless to say, getting mortgage with a 560 credit score is almost impossible nowadays.
According to Providian Financial executive J. Christopher Lewis, consumers could save $16 billion just on credit card finance charges if they raised their average score by 30 points.
In general, your FICO credit score represents the likelihood that you’ll pay your debts or default on your loan. A low FICO score means banks and other financial institutions may deny credit, charge higher interest rates, demand more collateral, or require extensive income and asset verification.
As such, every credit and lending decisions are based on an individual’s FICO score. It’s one of the most important factors to evaluate how much risk you are as a borrower.
If you are thinking of applying for a loan, it will be a good idea to first check where you stand on the credit score scale as where you’re on the scale can have a huge effect on the interest rates you’ll get and your ability to borrow money.