To determine if an applicant is creditworthy, lenders look at their FICO score, which may be anywhere from 300 to 850. The Fair Isaac Corporation (FICO) developed the score to evaluate the risk of lending money by looking at information in borrowers’ credit records.
Factors that go into determining a consumer’s FICO score include the following: payment history, present debt, credit categories, duration of credit history, and new credit accounts.
Companies large and small may benefit from the goods and services offered by FICO, a leading analytics software provider. One of the company’s most recognizable products is the consumer credit score, which is utilized by many banks and other lending organizations when making lending and credit decisions.
In the United States, many credit decisions are based on FICO ratings. Many lenders will not provide loans to those who have poor FICO ratings, even when applicants may dispute or explain unfavorable issues.
A FICO score might be anything from 300 to 850. A “good” credit history, according to most lenders, is one with a score between 670 and 739. However, it could be challenging to secure financing at favorable rates for individuals with credit scores between 580 and 669.
Lenders look at a borrower’s income, length of employment, and the kind of credit sought in addition to their FICO score when deciding whether or not to provide credit.
Having a variety of credit accounts and always paying your bills on time are two things that contribute to a good FICO score. A good rule of thumb for improving your credit score is to never use more than the amount you have authorized. Keep your credit usage percentage below 30% for optimal results.
Credit card debt, late payments, and an abundance of new credit applications all have a negative impact on FICO ratings. To make sure there are no mistakes on your credit report, you may check it often. Every year, the three main credit reporting agencies are required by law to provide you with one free credit report.
Each individual’s FICO score is based on a unique weighting of each area. On the whole, nevertheless, 35% of a credit score is based on payments made, 30% on accounts outstanding, 15% on the duration of credit history, 10% on new credit, and 10% on the mix of credit.
The term “payment history” describes a person’s track record of timely payments to their various credit accounts. All of the payments made on a certain line of credit are included in the credit report, which also includes information on any bankruptcy, collections, late, or missing payments.
A person’s “accounts owed” are the sums of money that they are responsible for repaying. It is not always the case that high levels of debt indicate poor credit. The ratio of debt to accessible credit is what FICO looks at instead. To provide an example, a person’s credit score may be worse if they have $10,000 in debt but are completely maxed out on all of their credit cards and lines of credit, compared to someone with $100,000 in debt but no accounts near their limits.
Generally speaking, a higher score is associated with a longer credit history. It is possible to get a high score even with a short credit history if the other categories are strong. Factors that go into FICO ratings include the average age of all accounts, the length of time that the oldest account has been open, and the age of the newest account.
The diversity of accounts makes up the credit mix. A good combination of retail accounts, credit cards, installment loans (such as auto or signature loans), and mortgages is necessary for people to get excellent credit ratings.
“New Credit” means accounts that have been created very recently. Rapid account opening is an indicator of risk and will reduce a borrower’s credit score.
Reference
Hayes, A. (2024, July 21). What Is a FICO Score? Investopedia. https://www.investopedia.com/terms/f/ficoscore.asp