The FICO Score is one of the most commonly used credit scoring models in the U.S, developed by Fair Isaac Corporation. Let’s delve a bit deeper to understand how the FICO credit scoring system works and why it matters.
FICO Score: An Introduction
FICO scores range from 300 to 850. A higher score is typically seen as less risky by lenders and can result in more favorable loan terms. Each of the three major credit bureaus – Experian, TransUnion, and Equifax – have their own FICO scores for each individual based on the data they collect.
How is FICO Score Calculated?
FICO scores are calculated using several factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).
Why is it Important?
Your FICO score determines whether you’d be granted credit and at what interest rate. Those with high FICO scores can get approval for loans quickly, receive the best possible interest rates, and have more negotiating power.
How to Improve Your FICO Score
Improving your FICO score means tackling the factors impacting it: pay your bills on time, keep your credit card balances low, limit the amount of new credit, and manage different forms of credit responsibly.
Understanding FICO Score Versions
Like software, FICO scores have different versions. The most widely used is FICO Score 8. However, FICO Score 9 has started to gain traction, considered to be more forgiving towards paid-off collections and puts more emphasis on unpaid medical collections.
Concluding Thoughts
Understanding your FICO score is an essential step in managing your financial health. In the lending world, it holds a key role that can either save or cost you thousands of dollars. Therefore, managing your credit responsibly can lead to great financial benefits.
