A FICO Score is the determination of how likely you will be repaying your loan, your financial reputation. It is a three-digit number that is based on the information of your credit report, and it helps lenders measure your credit risks quickly and objectively.
What exactly is a FICO® Score?
A FICO Score is the determination of how likely you will be repaying your loan, affecting on the amount of money you can borrow, estimating the monthly repaying time, and its cost (meaning interest rate). It is a three-digit number that is based on the information of your credit report. FICO, or Fair Isaac Corporation is a major analytic software company. FICO Score was estimated as the No. 1 piece of data of determining whether you’ll pay on a loan or whether you’ll get credit by a US News and World Report article. It is the summary of information in your credit report, compiling it into a single number that lenders can use to access your credit risks quickly, consistently, objectively, and fairly. It helps you get credit on actual repayment history and actual borrowing, rather than irrelevant info such as race or religion.
Understanding FICO Score
Known best for producing the most widely used consumer credit scores (used by thousands of creditors, including the 50 largest lenders) when it comes to lending money or issuing credit by financial institutions, FICO Scores are providers for products and services to businesses and consumers simultaneously, with more than 90% of FICO Scores being used when concerning credit decision in the U.S. It is also influential in other decisions as well, such as when you apply for a cell phone account, cable TV, and utility services.
Determining someone’s creditworthiness, lenders take into account the borrower’s FICO Score, considering income, the duration of their job, and the type of credit requested. FICO Scores differs between 300 and 850. Generally, scores in the range of 670-739 suggest a “good” credit history, with most lenders considering this score favorable, whereas a credit score in the range of 580-669 might cause difficulties for a borrower in securing a loan with favorable interest rates.
You have to maintain an excellent payment history background, and have a mix of credit accounts in order to achieve a high FICO Score. Things like applying for new credit haphazardly, late payments, and maxing out credit cards lower FICO Scores.
There’s a strong-point of argument to be made that borrowers should prioritize FICO above all bureaus when trying to build or improve credit, since having a low FICO Score, especially in the mortgage industry, because they maintain minimums for approval, and one point below that, will result in denial.
How to calculate FICO Scores?
Although FICO estimates each category differently for each individual, generally, 35% of the score is payment history, accounts owed is 30%, credit history length is 15%, new credit is 10%, and credit mix is another 10%.
Major Factors of a FICO Calculation
Referring whether the individuals’ account credit payments were made on time, payment history submitted for each line of credit reflected by the credit report, those reports further detailing bankruptcy or collection items, accompanied with any late or missed payments.
Referring to the amount of money owed by an individual. Although owing a lot of debt, this is not necessarily attributed to low credit scores. Instead, FICO estimates the ratio of money owed to the amount of credit availability. For example, an individual who owes more, but is not close to the limit on any of their accounts has a higher score than an individual who owes less money but has all of his lines of credit fully extended and all of their credit cards maxed out.
Credit History Length
The longer an individual has had credit, the better is their score, with FICO Scores taking into account the longevity of the oldest account, the age of the newest account, and overall average. However, it should be noted that an individual can have a short credit history that has a good credit score if they have favorable scores in the other categories.
A variety of accounts, in order to obtain high credit scores for an individual, this encompasses the need of credit cards, signature loans or vehicle loans (installment loans), mortgages, and a strong mix of retail accounts.
This refers to recently opened accounts. An indication of risk and a lower score will likely happen if the borrower has opened a bunch of new accounts over a short period of time.
The company’s updates on its calculation methods has been consistent and periodical since the introduction of its first scoring methodology in 1989. Each new version is made available to lenders, but it is up to them if and when they will instill the implementation of the upgrade.
With several unique features, making this version a more predictive score than its previous versions, FICO Score 8 is the most widely used version. The version, like previous FICO Score systems, attempts to convey how responsibly and effectively is the interaction of a borrower with debt. Higher scores are attributed to those who pay their bills on time, keeping low credit card balances, and only opening new accounts for targeted purchases. In contrast, for those who are frequently delinquent, over-leveraged, and impulsive in their credit decisions, they are attributed with lower scores. Collection accounts which have a balance of less than $100 are completely ignored.
FICO Score 8, unlike past versions, treats more judiciously isolated late payments, it is more forgiving if a late payment is an isolated event and the individual has other accounts in good standing, also providing better statistical representation of risk by dividing customers into more categories, its primary purpose of this being to keep borrowers with little to no credit history from being graded the same as those with robust credit stories. Its additions of the versions also include two highly utilized credit cards – low credit card balances on active cards can influence more a borrower’s score.
Fair Isaac released the FICO Score 9 to consumers in 2016, with new additions, such as the treatment of medical collection accounts, a more forgiving approach to fully paid third-party collections, and increased sensitivity to rental history. It is noteworthy that the new version has not been adopted by none of the major credit bureaus.