A FICO score is a credit score developed by Fair Isaac Corporation (FICO). Lenders use borrowers’ FICO scores in conjunction with other information on their credit report to determine the risk to credit and decide if they should extend credit. FICO scores consider information from five areas that determine creditworthiness:
- Payment history
- Current debt levels
- Type of credit utilized
- Length of credit history
- New credit accounts
- The FICO score is a way to quantify and evaluate the creditworthiness of an individual.
- Scores vary from 300 to 850, with scores in the range of 670-739 being considered “good” credit history.
- The FICO scoring system is updated every so often, and the most recent version currently is FICO Score10 Suite which was officially announced in January. 23rd, 2020.
Understanding FICO Scores
FICO is an analytics software giant which provides services and products for both consumers and businesses. FICO is known for its popular ratings for consumer’s credit scores that banks use when deciding whether to give money out or issue credit.
The total FICO score ranges from 300 to between 300 and. Generally, scores within the 670-739 range represent “good” credit history, and most lenders will find this score favorable. However, those in the 580-669 range might have difficulty getting financing at competitive rates. In determining creditworthiness, lenders will consider the person’s FICO score. However, they also consider other aspects, like income, the length of time that the borrower has worked at their job, and the kind of credit they are seeking.
FICO scores are utilized in over 90% of credit decisions within the U.S. 5 While borrowers can explain the negative aspects of their credit reports, the reality is that having a poor FICO score can be an issue with many lenders. Many lenders have strict FICO thresholds for approval, particularly in the mortgage sector. 67 one point less than this threshold will result in a rejection. Thus, a convincing argument is that borrowers must prioritize FICO over any other bureau when enhancing or strengthening credit.
To achieve a high FICO score is a matter of having an array of credit cards and maintaining good payment records. Also, borrowers should be cautious by ensuring their credit card balances are at or below their limit. Excessing credit card balances or making payments late, and applying for credit in a hurry are all factors that can reduce the FICO score. 8 Additionally, considering the significance that a high FICO score could be a factor in a variety of credit-related decisions, it could be worth investing in a reliable surveillance service for your credit to ensure that your data is secure.
Calculating FICO Scores
To determine credit scores, the FICO evaluates each credit category differently for each person. In general, payment history accounts for 35 percent of the score. The amount owed on accounts is 30%, the length of the credit record is 15%. And new credit equals 10%, and the credit mix is 10% percent.
History of payments (35 percent)
Payment history is how to determine if an individual can pay their credit accounts punctually. Credit reports reveal the amount of payments made on each credit line. The reports also detail the collection or bankruptcy issues and any late or late fees.
Accounts due (30 percent)
Accounts owed refers to the amount an individual is obligated to pay. Being in debt is not always a sign of a poor credit score. Instead, FICO considers the ratio of the amount owed to the available amount of credit. For instance, a person who owes $10,000 but has all their credit lines extended and their credit cards are maxed out could have a lower credit score than someone who has a $100,000 debt but is not even close to the maximum limit each one of their credit cards.
The length of credit history (15 percent)
As a guideline, the more time someone has had credit and had a good credit score, the higher their score. But, with good scores in other areas, even those with a poor credit history can score a great score. FICO scores consider how long the oldest credit card has been in existence and how old the new account is, as well as the average of all.
Credit mix (10%)
The credit Mix is the range of accounts. For a high credit score, people require a solid mixture of retail accounts; installment loans; credit cards, car loans, signature mortgages, and loans.
Credit new (10 percent)
New credit is a term used to describe recently opened accounts that have been opened recently. If a person has opened several new accounts in a brief period, this is a sign of risk and can lower their credit score.
A variety of different versions of FICO exist because the firm has constantly modified its calculations since it introduced its first scoring method in 1989. Every new version is released to lenders; however, it is their responsibility to decide if and when to adopt the latest version.
The most used version, as of 2021, is FICO Score 8 despite being closely followed by FICO Score 9 and FICO Score 10 Suite. FICO Score 9 came out in 2016 and was accompanied by modifications to the treatment of medical collection accounts, a greater sensitivity to rental history, and a more flexible approach to fully-paid third-party collections. The score did not exceed FICO Score 8 when it came to its popularity. However, the addition of data from the credit bureaus in a trend within FICO Score 10T (part of the FICO Score 10 Suite, which was announced on the 23rd of January. 23rd and 2021) could lead to it being able to take over FICO Score 8 shortly.
Strategies: FICO score of 5 is a possible alternative for FICO score of 8, which is still used in mortgages, and credit cards.
According to FICO Score 8, the score aligns with older versions, but some specific aspects provide a more accurate score than previous versions. As with all FICO earlier scores, FICO Score 8 attempts to demonstrate how responsibly and efficiently a borrower manages the debt. Scores are typically higher when you pay your bills on time, maintain the balances of their credit cards low, and only create new accounts to make targeted purchases. In contrast, lower scores are due to often late, excessively leveraged, or reckless in their credit decisions. This also does not consider collections accounts where the balance was initially lower than $100.
The improvements included in FICO Score 8 include a greater sensibility to credit cards. This means that low credit balances on active cards could significantly positively impact the borrower’s credit score. The system also handles late payments with more care than previous versions. The FICO score 8 rating is much more lenient if a late payment occurs as an isolated case and all other accounts have good credit and separate consumers into different groups to estimate the risk more. The main reason for changing this was to protect borrowers with little or no credit histories from being rated according to the same scale as those with solid credit history.