In theory, you have a FICO score if you have credit. However, how exactly is it calculated? By never disclosing the specifics of the FICO methodology, the Fair Isaac Corporation maintains the mystique around its FICO ratings. The specifics of its technique are still open to modification at its discretion, even if they were disclosed.
What is a FICO score, and Why is it Important?
A FICO score is a three-digit number, usually in the range of 300-850 that tells lenders how likely the consumer will repay borrowed money according to the history of the credit.
Your FICO credit score is important because it influences the conditions and interest rates that you may receive on financial goods like mortgages and auto loans. A good or excellent score, for example, gives you much greater choices and access to lower interest rates. Utility companies and landlords may also use your credit score to determine your deposit or to say whether you will get accepted as a tenant.
How is a FICO score computed?
In order to generate a score, the business uses its exclusive algorithm applied to the information in your credit reports. Although the precise scoring algorithm used by FICO is not disclosed, it provides helpful guidance on the important aspects that affect scores. Almost two-thirds of your score is determined by timely payments and low balances. A little over two-thirds of your score is made up of timely payments and low balances.
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Payment history (35% of your score): This is the most crucial variable in scoring well. The longer you pay bills on time and/or have accounts in collections, bankruptcy or bankruptcy will seriously detract from it.
Amounts Owed (30%): Credit utilization is how much of your available credit you are using. You want to utilize no more than 30% of your available credit.
Credit History Length (15%): That is, how long you have had credit and the average age of your credit accounts.
New Credit Accounts (10%) of your overall score: A so-called hard inquiry when applying for new credit can damage your score by up to six months, so it’s a good idea to do research on credit card offerings and the eligibility requirements before actually applying for one.
Credit mix (10%): You have to have a mix of installment loans-carrying level payments, like a car loan or mortgage and revolving credit, and a credit card to help your score.
FICO is the Gold Standard for Mortgage Lenders
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FICO claims it is applied by 90% of the “top lenders,” and the law gives it an edge in one key area: mortgages for homes. Currently, it’s the only credit risk measurement instrument approved for use by government-sponsored businesses such as Freddie Mac and Fannie Mae.
While lenders primarily apply far older FICO score versions, they will accept FICO 10 T in the coming years, which the Federal Housing Finance Agency recently enabled use after deciding to allow the applications of FICO 10 T and VantageScore 4.0 for sold loans to Fannie and Freddie with its decision in 2022.
It will “take a multiyear effort” to coordinate the implementation of these two scoring methods, but the benefits are anticipated to be substantial, opening up house ownership to a larger and more diverse range of individuals.
How do I get a FICO score?
You may already have a free FICO score available to you through your credit card statement or banking app. Several credit card companies, such as Bank of America and Discover, offer customers free FICO scores each month.
You can also purchase one directly on the company’s website. It costs $29.95 a month to obtain FICO scores from all three credit bureaus, plus other kinds of information, including your automotive FICO score. If you are going to purchase a large item such as a car or home, it might be money well spent to pay for a month, glance over the reports, and then cancel.
That way, you will be going into the lender’s office with no surprises. Many personal finance sites, such as NerdWallet, include a free VantageScore from FICO’s nearest competitor. That provides an extra way to monitor that score. VantageScores tend to change in line with FICO scores since both use many of the same factors and draw on much of the same data coming from the credit bureaus.
The Bottom Line
Paying your payments on time and having low debt would be difficult ways to break the other requirements, even if payment history and amount owing only account for 65% of your FICO score.
The FICO score is surrounded by a lot of mystery, but it doesn’t have to be. Although it might be helpful to understand the fundamentals of the FICO calculation, customers shouldn’t let this lead them to believe that they can manipulate the system. In the end, your debt load and payment history will have a significant impact on your FICO score.
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