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What Does That FICO Score Mean?

New federal regulations allow you to get your credit report once a year from each of the three major credit reporting bureaus. The new law granting you access to this information, lawmakers felt, would help protect you from identification theft and ensure more accurate records were kept of your credit history. Another benefit of being able to access your credit file is getting to know your credit score.

The credit score is how lending institutions determine your credit worthiness. In other words, the higher your credit score, the better credit risk they feel you will be. Under guidelines used by most mortgage lenders, a score of 650 or above indicates you have a very good credit history; you pay your bills on time, your credit lines are not over extended, your income to debt ratio is within conservative bounds. 

The average American has a score between 620 and 650. This indicates you have fairly good credit, but there may be some issues that need to be researched before a large loan or a mortgage is made. Some things that would lower your credit score are late payments on monthly obligations such as utility bills and rent or car payments, having a larger line of credit than your income can sustain or too many standing financial obligations.

A FICO score below 620 is a major impediment to obtaining credit. This tells lenders that you have not acted in a responsible way with credit in the past, which is an indicator of future behavior. A score this low may include previous bankruptcies, default on loans, repossession of vehicles, or eviction for non-payment of rent. None of these things alone would be sufficient to deny you credit, but usually shows a pattern of payment that would be alarming to lenders. 

With a score above 650 you should not have any trouble obtaining credit on good terms quickly. With a score between 620 and 650 you can borrow money at a fairly good rate, but it may take longer because you will have to produce additional documents while the lender scrutinizes your money handling habits. A score below 620 means you are a greater risk. The application process will be long and the terms offered on your loan will be less attractive than if your score were higher, but you can probably still get credit. 

The driving force behind the granting of loans is the return on investment. Lending institutions want to ensure that their investors’ money is well spent and will yield a sure return. By improving your credit score you demonstrate to the lending institutions that their investment in you will be rewarded.

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