Your FICO score is pretty significant when you are applying for a loan. Lenders consider FICO score to evaluate the level of risk associated with lending you money. But what exactly does your FICO score signify? How is it calculated? And most importantly, how can you improve it? Read to know more.
What is a FICO score?
A FICO score is a three-digit number that is provided by the Fair Isaac Corporation. It is based on your payment history, current amount of debt, types of credit used, length of credit history, and new credit accounts. It helps lenders figure out how reliable you are.
Your FICO score can influence the loan amount you can borrow, your loan terms, and rates. However, FICO is widely used by financial institutions, so knowing your FICO score prior to your loan application or line of credit might be beneficial.
Why are FICO scores important?
Your FICO credit score is important because lenders use these credit ratings to determine whether or not to provide you with financial help.
A very good or exceptional FICO credit score can save you significant money on your mortgage. And with a fair credit score, you would land on moderately decent loan options. But with a poor credit score, chances are you won’t even get a lender to risk for your financial assistance.
This is why having good credit is essential. As your FICO score rises, you will have access to better credit cards, higher rewards, cheaper interest rates, and more financial options.
How FICO scores work
The United States has three credit bureaus: Experian, Equifax, and TransUnion. Each one calculates your FICO score differently. FICO score 8 is the most widely used scoring methodology.
FICO scores range from 300 to 850, with most people scoring in the 600s or 700s. When deciding whether or not to issue a loan or credit to a borrower, lenders assess your credit score. Along with criteria such as income, employment stability, and outstanding debts.
How are FICO scores calculated?
FICO calculates credit ratings by weighing each category differently for each individual. Here are the factors that affect your FICO score:
Payment history (35%)
Payment history relates to whether or not a person pays their credit cards on time. Credit reports reflect the payments made on each line of credit, any bankruptcy or collection issues, and any late or missed payments.
Accounts owed (30%)
Accounts owing refers to the amount of money owed by a person. Having a lot of debt does not always imply having a low credit score. Rather, FICO examines the amount outstanding in relation to the amount of credit available.
Length of credit history (15%)
As a general rule, the longer a person has had credit, the higher their score. Even if you have a short credit history, you can have a good credit score if you have good scores in the other categories. FICO scores consider the age of the oldest account, the age of the newest account, and the overall average.
Credit mix and new credit (10% each)
The credit mix is the number of accounts. Individuals with good credit scores must have a diverse portfolio of retail accounts, credit cards, installment loans (such as signature loans or vehicle loans), and mortgages.
Accounts that have recently been opened are referred to as “new credit.” If a borrower opens many new accounts in a short time, it signals risk and decreases their credit score.
What is a good FICO score?
An excellent FICO credit score is one that is 670 or higher. However, if you want to take advantage of reduced interest rates, better credit card incentives, and better loan terms, you’ll need to raise your FICO credit score.
FICO scores by percent of the scorable population
|Fico score||Rating||What the score means|
|<580||Poor||Way below the average.
Shows lenders that you are a risky borrower.
Have better opportunities than people with poor credit scores.
|670-739||Good||Around or a little bit above average.
Apparently considered a good score by most lenders.
|740-799||Very good||Above average.
Shows lenders that you are very dependable.
|800 and above||Exceptional||Well above average
Shows lenders that you are not at all a risky borrower.
FICO score vs. VantageScore
VantageScore was made by the three biggest credit companies together and came out in 2006. FICO is well-known to consumers and is used by many lenders. However, both consumers and lenders are becoming more interested in VantageScore.
FICO says that it is used in at least 90% of lending choices, and the law favors it in one very important place: home mortgages. Right now, it’s the only tool that government-backed companies like Fannie Mae and Freddie Mac are allowed to use to measure credit risk.
But starting in October 2022, the Federal housing finance agency required loans given to Fannie Mae and Freddie Mac to use FICO 10T and VantageScore 4.0. Even though putting these two scoring models into place will take a multiyear effort to coordinate, the benefits should be big, especially for people of color who want to buy a house.
FICO score vs. Credit score
FICO scores are one kind of credit score, and you can also have more than one form of a FICO score. Most people use FICO 8, which came out in 2009. FICO 9, FICO 10, and FICO 10T are all recent ones.
Most mortgage lenders use much older forms of the FICO score, but in the next few years, they will start using FICO 10 and 10T. UltraFico is another type that is fairly new. It is for people new to credit or wanting to rebuild it. It uses the same 300-850 scale as FICO but bases its number on activity in deposit accounts.
Since releasing the original FICO scoring system in 1989, the firm has released multiple iterations of the program, each with slightly different calculating algorithms. Lenders have access to each new release, but it is ultimately up to them to decide if and when to actually upgrade. Even though the FICO score 9 and FICO score 10 have been released, the FICO score 8 is still the most popular.
In 2016, FICO launched score 9, which improved upon previous versions by reevaluating medical collection accounts, giving greater weight to rental history, and relaxing the penalties associated with paid-off third-party collections. However, the FICO score 10T may eventually replace the FICO score 8 due to its addition of new and more relevant credit bureau data.
Why are there different FICO scores?
Fico’s credit score models are always getting updated to better satisfy current credit usage demands. Also, different models meet the requirements of many sorts of lenders. Auto lenders and credit card companies assess your creditworthiness in different ways. FICO developed industry-specific scores to assist lenders in making better judgments and providing better service to their clients.
There are also different kinds of credit scores from FICO. A lender might look at your FICO score if you want to refinance a car loan. When you apply for a credit card, a lender might look at either your FICO 8 score or your FICO bankcard score. The UltraFico score looks at your bank account amounts and other information that doesn’t have to do with your credit. This makes UltraFico a great choice for people who don’t have much credit history or who don’t want a credit card but want to build credit.
But even though there are many different ways to score, you don’t have to keep track of each of your individual points. Since FICO 8 is the most popular credit score model, FICO says that knowing your FICO 8 score is good enough for most cases. Still, if you want to get a car loan or a mortgage, you might want to look into FICO scores that are more specific to those things.
How often does the FICO score update?
Each lender has its own reporting schedule for payment information to credit bureaus. Your credit score can fluctuate roughly once per month, but it may fluctuate more frequently if you have multiple active loans.
How do I get a FICO score for free?
It’s smart to keep tabs on your credit rating. And here’s what you can do to get your hands on your free FICO score. Free credit scores are easily available from major credit bureaus. You have to log into your online account to get more customized info.
How to improve your FICO score
A wide variety of credit accounts and an excellent payment history are necessary for a high FICO score. Keeping your balances much below the maximum allowed also helps your credit. The perfect ratio of debt to available credit is less than 30%.
Credit ratings will drop if you use all of your available credit, are late with payments, or apply for additional credit regularly. Credit reports can be checked on a regular basis to maintain accuracy. One free credit report per bureau per year is your legal right.
One of the most popular techniques for evaluating a borrower’s creditworthiness is their FICO score. FICO scores are a common tool used by American lenders to evaluate mortgage applications. While having a low score can be discouraging, you can raise it by borrowing wisely and paying your bills on time.
What is the full form of FICO?
Fair Isaac Corporation is referred to as FICO. FICO was the first to create a system for computing credit scores using data gathered by credit reporting bureaus.
Who uses FICO scores?
90% of reputable lenders base their decisions on FICO scores when determining credit approvals, conditions, and interest rates. When lenders examine a FICO score, they are aware of what they are getting.
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