What is the Perfect FICO Score?

Beginning in the 1990s credit scores became a key tool for lenders to use in assessing the risk of potential borrowers. The FICO credit score is by far the most widely used but many people know very little about what the score means. Learn how the perfect FICO score is computed and how you can get your own credit score as close to the perfect FICO score as possible.

Identification

A FICO credit score is a number that represents your credit history and tells lenders how risky it is to lend you money. The score is based on a system created by Fair, Isaac and Company (FICO is an acronym for their company name). The score has a range from 300 to 850, with 850 being a perfect FICO score.

Types

FICO isn't the only credit scoring system, though it is the most widely used. The credit scores you get from any of the three major credit reporting companies (Equifax, Experian and TransUnion) are FICO scores. Your score can vary from one company to another since each applies the FICO model to the information they have in your file. Keep in mind that your credit history and your credit score are different things. You are entitled by law to a free copy of your credit report each year from the credit reporting agencies, but it does not include your credit score. You have to pay a fee to see your FICO score.

Function

Not all the people who use your credit score are lenders. Banks check it before opening an account for you and employers often check your credit rating before hiring you. Lenders use the FICO score to decide if they will lend you money and how much interest they will charge. A good FICO score is 640 or higher. That's the level at which you'll get the best mortgage interest rates from Fannie Mae or Freddie Mac. A score of 620 is acceptable, though you will have interest rates that are a little higher. Anything below 620 is considered "sub prime." This doesn't mean you can't get any credit, although it's very difficult if you're seeking to finance a home or other large purchase. However, there are lenders that will loan money to people who have far lower scores, but they will charge higher interest rates.

Features

Fair, Isaac and Company don't reveal exactly how your credit score is calculated, but they have disclosed the major factors making up the score and how they are weighted. The most important is how promptly you pay bills, which counts for 35 percent of the FICO score. Next is the total amount of debt you owe compared to your income (30 percent). The type of debt you have counts 10 percent. Too much unsecured debt (like credit card debt) is a negative, while a home mortgage is not going to hurt your credit rating unless it's simply too large for your income. The depth (how many years you've been using credit responsibly) counts for 15 percent. Finally, frequently opening and closing credit accounts can count up to 10 percent off your credit score, especially if you apply for credit and are turned down.

Considerations

To get a perfect FICO score, or even a reasonably good one, there are some things you must avoid. If you run into financial trouble, do not be more than thirty days late on any payments. If that proves impossible, call the lender before the 30 day mark is reached and try to make specific payment arrangements. If you do this, many lenders will not report a 30 day late payment provided you honor whatever agreement you make. Tax liens, judgments against you for nonpayment of debts or defaulting on a debt will stay on your credit record for years. The same is true of a foreclosure or bankruptcy. One of the most damaging things is a default on a student loan, because this will stay on your credit record for the rest of your life.