Explain FICO Credit Score –
FICO stands for Fair Issac Corporation. FICO credit score is a credit score issued by Fair Issac Corporation. Lenders, banks, and other financial institutions evaluate the borrower’s FICO scores along with details on the borrowers’ credit reports to assess the credit risk and determine whether to extend credit. It is one of the leading tools used by lenders to determine the creditworthiness of the borrower. FICO scores are used in most mortgage application decisions in the United States of America. They are currently used in 90% of the decisions.
Individuals can improve their FICO score by paying their bills on time, having different types of credit, and using less than 30% of the available credit. FICO scores range from 300 to 850. Scores in the range of 670-739 are considered good. This score is favorable for most lenders. Borrowers with credit scores between 580-669 will find it difficult to get finance at attractive rates. Borrowers with a FICO score above 800 are considered exceptional. Lenders consider FICO score, but they also look into other details like income, type of credit used, and how long the borrower has been at their current job.
The methodology of FICO is also updated from time to time. The FICO Score 10 Suite’s most recent version was announced in 2020. FICO scores take into consideration five major factors. These are payment history, types of credit used, new credit accounts, length of credit history, and the current level of indebtedness. Payment history is the major factor and occupies 35% of the credit score. It shows if the individual is paying their dues on time.
The total amount owed is the second major factor and occupies 30% of the credit score. It is the percentage of credit available to the individual which is being used. Length of credit history occupies 15%. Long credit histories are considered less risky. The type of credit occupies 10%. It shows if the individual has any mix of installment credit such as car loans or mortgage loans. New credit occupies a balance of 10%. It shows how many new accounts the individual has opened.
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