Breaking Down the FICO Credit Scoring System

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Your credit score is one of the most important numbers in your life and can play a major role in your financial future.

It can mean the difference between getting approved or denied for a mortgage. It also determines what type of interest rate you’ll pay on a loan. If you’ve ever applied for a loan, chances are you’ve heard of a FICO Credit Score. According to FICO, their score is used in over 90% of lending decisions in the U.S. What many people don’t know are what factors determine their score and the weight these factors carry. We’ve broken down the FICO Credit Scoring system to help you better understand your credit score.

What is a FICO Credit Score?

A FICO Score is a credit scoring model created by the Fair Issac Co. and serves as the most commonly used credit score according to CEB TowerGroup. If you are applying for a loan or line of credit, lenders will use your FICO score to determine your credit risk or how likely you will be to pay back your loan.

This three-digit score generally ranges from 300-850, where the higher number represents less risk to potential lenders. Your FICO Score is calculated from information and data supplied by each of the three major credit reporting companies (Experian, TransUnion, Equifax). While you might not always be turned away for having a low credit score, it can certainly hurt your chances of receiving a better loan rate.

Factors of a FICO Credit Score

Five factors are taken from your credit report and are used in calculating your FICO Credit Score:

Payment History: Your payment history makes up 35% of your FICO Score, making it the most heavily weighted factor. Before creditors give you a loan, they want to ensure they will be paid back. This section of your credit score shows how you’ve paid (or didn’t pay) your bills in the past, how late they were, and how much was owed.

Amount Owed: The amount of debt you owe on your accounts makes up 30% of your FICO Score. This means using too much of your available credit on your accounts will lower your score, as you’ll appear to be more likely to be late or even miss a payment. You may want to consider keeping your credit utilization rate low to show lenders you can spend responsibly.

Length of Credit History: Your FICO Score takes into account how long each of your accounts have been open. This includes the age of your oldest (and newest) account. It also includes the average age of each account, as well as the age of specific accounts such as your credit card accounts. Generally, a longer credit history is better for your score. This makes up 15% of your FICO Score.

New Credit: The amount of new credit accounts you have make up 10% of your FICO Score. This includes the number of recent credit inquiries and how long it has been since you last opened an account.

Type of Credit: Lastly, the type of credit accounts you have make up 10% of your FICO Score. Different types of credit, such as your mortgage, credit cards, and car loan, make up your credit mix and can impact your score. However, this doesn’t mean you need to have each of these credit accounts open. In fact, MyFICO recommends not opening these types of accounts just for the sake of it if you don’t actually intend to use them.

Common FICO Score Versions

The most common Base FICO Score is FICO Score 8. This version determines your credit risk on most loan types and provides the overall picture of your credit score. There are also industry-specific FICO Scores which. Just as they sound, these provide a credit score tailored to the type of credit. For example, if you were to apply for a credit card, you might want to know your FICO Bankcard Score, as a lender may use this over a Base FICO Score. The same is true for an auto loan, as your lender may use your FICO Auto Score. Consider checking out the full list of FICO Score Versions.

There really is no quick fix to achieve an excellent credit score. Establishing credit and practicing good credit habits early is important to build a solid score. Since a high score can mean a better rate on a loan, you can save tons of money over time. You can learn more about your credit history and score in Leslie Tayne, Esq.’s bestselling book, Life and Debt. Do you know your credit score? Has your score hurt or helped you in a loan situation? Tell us your stories and comments below.

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