Guide to the FICO Credit Score

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A FICO Score is a three-digit number that lenders use to determine whether or not to engage with you based on your financial responsibilities. Consider it a financial report card, but instead of determining whether you pass or fail a class, it affects whether you’re authorised for loans or lines of credit and what interest rate you’ll receive.

Fair Isaac Corporation, now known simply as FICO, invented it in 1989 as a tool to help lenders make more informed decisions about borrowers without having to decipher the complexity of their credit reports. According to FICO data, it was the first credit scoring model to appear on the scene and is still the most extensively utilised today, with over 90 per cent of lenders utilising it to assess risk.

FICO score

Since its inception, the FICO® Score has gone through various modifications as the firm strives to improve its system to better anticipate risk. The FICO Score 9, the most recent FICO Score, and the FICO® Score 8, the most commonly used score, both consider the five elements listed below:

History of payments (35 per cent)

Amount owed (30 per cent)

Credit history length (15 per cent)

Credit allocation (10 per cent)

New credit (10 per cent

Payment history

Our payment history is the single most important component in calculating your FICO Score, accounting for 35% of your total score. This award is given to it since it is such a fantastic indicator of how you’ve managed your money in the past. Someone who always pays their debts on time is regarded as responsible and living within their means, whereas someone with a history of late payments may lack the appropriate funds to repay any new money borrowed.

This section of your FICO Score considers your credit card payment history, including retail store cards, as well as mortgages and other sorts of instalment loans, and other types of financial firm accounts. Negative information from public records, such as bankruptcies and lawsuits, can also have an impact on the payment history section of your FICO Score. If you have a history of late payments, the FICO model takes into account how late they were, how recent they were, how many you have across, how many accounts, and how much you owed.

Amounts owed

This category considers how much you owe on your current credit accounts and is nearly as essential as payment history, accounting for 65 per cent of your FICO Score. When it comes to instalment debt (loans with predictable monthly payments), the FICO scoring model considers how much you owe and how it compares to the initial amount borrowed.

FICO considers your credit usage percentage when it comes to revolving debt, such as credit cards, where the amount you owe increases from month to month. This is the percentage of credit available to you divided by the amount of credit you utilise each month.

Amounts outstanding are regarded as a significant indicator of financial responsibility since a heavy reliance on credit shows someone who is living beyond his or her means. Adding another loan or credit card to the mix may make it impossible for the individual to meet his or her monthly obligations.

Credit history length

The length of your credit history is the third consideration in your FICO Score, and it is rather easy. It provides lenders with a more complete picture of how well you use credit, so a longer credit history usually equates to a higher credit score, assuming you’ve consistently paid on time and kept your credit use low. This category considers the age of your oldest and newest credit accounts, as well as the average age of your credit accounts, as well as the length of time since each account was used.

Closing an old credit card that you no longer use may appear to be a good option, but if it is your oldest credit account, it will reduce your average credit age and your credit score may suffer as a result. Unless it includes an annual charge that you no longer want to pay, you’re usually better off keeping it in your wallet.

Credit mix

Credit mix accounts for 10% of your FICO® Score and assesses the various types of credit accounts you have. You’ll have a higher credit score if you have some revolving debt, such as credit cards, as well as some instalment debt, such as a mortgage, car loan, or personal loan, on your credit reports. Lenders want to see that you can manage both sorts of debt properly. Even if you have paid off your loans, they still count toward your credit mix.

New credit

The last category is for fresh credit. According to research, applying for a large number of new credit accounts in a short period of time suggests a higher risk, therefore you should avoid applying for a large number of credit cards and loans in a single year. This category considers the number of new accounts you have opened as well as the number of credit queries on your credit report.

Good FICO score

There are no hard and fast standards for determining what constitutes a high FICO score. Each lender will have their own definition of what constitutes an acceptable credit score, however, FICO defines the credit score ranges as follows:

Exceptional          800-850

Excellent              740-799

Very Good            740-799

Good                     670-739

Fair                       580-669

Poor                      300-579

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