A FICO score is a numerical representation of an individual's creditworthiness, providing lenders like DreamSpring with a standardized measure to assess the risk of extending a loan to a borrower. The acronym "FICO" stands for Fair Isaac Corporation, the company that developed this widely used credit scoring model. Your FICO score plays an important role in how lenders like DreamSpring reach a decision.
FICO scores range from 300 to 850 — the higher the score, the more creditworthy a borrower is perceived to be. A lower FICO score will not necessarily preclude you from receiving a loan, but it means that you are perceived to be a higher risk for lenders.
Your score is calculated based on information gathered from your credit report, including your financial behaviors (like paying bills on time and not maxing out multiple credit cards). The score considers a number of factors with an assigned weight to create the overall score.
The five primary factors that contribute to a FICO score are:
- Payment History (35%): This is the record of a person's payments on credit accounts, including credit cards, mortgages, and other loans. Timely payments positively impact the score, while late payments, defaults, or bankruptcies can have a significant negative effect.
- Credit Utilization (30%): This factor reflects the ratio of a person's outstanding credit card balances to their credit limits. Lower credit utilization percentages generally result in higher FICO scores, as they suggest responsible credit management.
- Length of Credit History (15%): The length of time an individual has held credit accounts is considered. A longer credit history is generally seen as favorable, demonstrating a person's ability to manage credit over an extended period.
- Types of Credit in Use (10%): FICO scores take into account the various types of credit a person has, including credit cards, installment loans, mortgages, and retail accounts. A diverse mix of credit can positively impact the score, as it suggests responsible credit management across different financial instruments.
- New Credit (10%): This factor considers the number of recently opened credit accounts and the frequency of recent credit inquiries. Opening multiple new accounts in a short period may be perceived as a sign of financial stress and can potentially lower a FICO score.
Want to learn more about your FICO score? The Consumer Financial Protection Bureau (CFPB) has additional resources about your FICO score and what you can do to improve your credit. Learn more here.