The FICO credit scoring system is one of the most widely used credit assessment tools. It is important to understand how the score is determined to help you improve your own credit score.
Source of the Score
Your FICO credit score is calculated by Fair Isaac Corporation. Fair Isaac reviews the information in your credit report and analyzes the data using a proprietary formula.
Please note that your credit score is only as good as the information available to Fair Isaac. If there is incorrect or outdated information, it will affect your FICO credit score.
Factors Affecting the Score
To create your credit score, Fair Isaac looks at your information in different ways, using the following ratings and relative weights: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, 10% types of credit.
If you are trying to improve your score, you may need to focus on one or more of the components mentioned above.
Before you make every effort to manage your FICO credit score, remember that lenders may look at other factors besides your FICO credit score. For example, you may be able to show the lender that you just got a better-paying job and will be able to cover all of your debt payments.
Payment History Category
This is a simple record of how well you pay your bills on time. Every time you are late with a payment, it will negatively impact your score a little, and being 60 days late is worse than being 30 days late, and so on. To avoid affecting your credit score:
- Pay your bills on time. If you can’t make a payment on time, inform the lender that you need to come to an agreement.
- Check your late accounts and try to pay them off.
Amounts Owed Category
Generally, this refers to credit card debt and the percentage of available credit you are using. Divide the total outstanding balances across all your accounts by the total credit limits available to you. The lower the ratio, the better. To help maintain a strong credit score:
- Keep your balances related to your credit limits at 30% or less.
- Don’t open new accounts just to reduce your used credit. Having excess credit is also a risk.
Length of Credit History Category
People with a long credit history are considered safer than those with a limited credit history. In other words, someone with a long history of loans and timely payments will have a higher credit score than someone applying for a loan for the first time. To help in this category:
- You might consider keeping older accounts if you have managed them well. Start building credit as soon as possible.
New Credit Category
Every time you apply for a loan or credit card, the lender will perform a credit check. These checks appear on your credit report, and your credit score will be affected if there are many applications for loans or credit cards in a short period because they are seen as risky. To avoid impacting your credit score when applying for a loan:
- When shopping for new credit, do so within a short time frame such as 14 days or less.
- Borrowers with a poor history can improve their credit scores by opening a new account and managing it responsibly.
Types of Credit Category
Lenders want to see borrowers with a diverse credit history, so having multiple types of loans can help raise your credit score. However, not all loans are created equal:
- Debt
- Debts that require fixed monthly payments to eliminate debt are better than revolving debts (credit card debts with a revolving balance).
- Some debts related to financing companies (like purchasing a product using store financing) can lower your credit score. You will be considered an experienced borrower if you have a mortgage, an auto loan, a few credit cards, and a student loan. If you only have credit card debts, you will appear inexperienced.
In general, you should know that improving credit scores takes time and discipline. The rules mentioned above should become second nature to you. Finally, do not fall for promises of instant credit score improvement (or for a fee). Under rare circumstances, you can remove legitimate errors from your credit reports faster than usual (using rapid re-evaluation), but you cannot do anything about accurate information.
Source: https://www.thebalancemoney.com/fico-credit-score-315552
Leave a Reply