If you’re in the market for a new car, house or another large expense, you are probably familiar with the term “FICO score.” Fair Isaac Corporation (FICO) was established thirty years ago and is the industry-standard for scoring creditworthiness. FICO scores are used by over 90% of top lenders to help make decisions about credit approvals, terms and interest rates. Chances are when you apply for a mortgage, an auto loan, credit card, or a new line of credit, the bank or lender is looking at your FICO Score to help determine if they should loan you the money.
A FICO score is a summary of your credit report. It measures how long you have had credit, how much credit you have, how much of your available credit is being used and if you have made payments on time. In the past, credit scores were calculated in a variety of unfair ways, including by gender and political affiliation. Today, FICO scores help lenders make smarter and quicker decisions about who they loan money to. Paying your bills on time, not carrying too much debt and making smart credit choices can positively influence your score.
FICO scoring models are updated every five years. News of the latest FICO score model, FICO Score 10 and 10T, was announced in January of 2020. Although this is the most current model, FICO Score 8, which was released in 2009, is most commonly used today. Lenders will most likely begin adopting the new FICO Score 10 model by the end of the year, but many lenders will still opt to use older versions. Creditors are reluctant to be the first ones to try updated credit scoring models with significant changes because there is a lot of risk.
The five main factors used to determine your FICO score are:
• Payment History – When it comes to credit scoring, payment history is extremely important. Lenders want to ensure that you will pay back your debt in a timely fashion. This factor accounts for 35% of your overall FICO score.
• Amounts Owed – This factor has to do with revolving credit. The amount you currently owe is divided by your credit limit to determine your credit utilization rate. 30% of your FICO score is determined by how much you currently owe compared to your credit limit.
• Age of Credit History – 15% of your FICO score is determined by how long you’ve held credit accounts. An average age of all your accounts combined play into this factor.
• Credit Mix – This relates to carrying a diverse portfolio of credit accounts, including car loans, credit cards, mortgages and student loans. This accounts for 10% of your FICO score.
• New Credit Accounts – The number of credit accounts in your name, as well as the amount of times lenders make hard inquiries about your credit effects your FICO score by 10%.
What is FICO Score 10 and how can it help me?
Many people think of a FICO score as a snapshot of their credit history. The FICO Score 10 is just that – an updated snippet of someone’s credit report. However, the FICO Score 10T is instead like a short video, pulling up 30 months of past credit data to predict consumer behavior (which is referred to as “trended data”). The FICO Score 10 Suite’s new models will treat late payments and debt more severely. They will now consider historical information about someone’s credit card balances and payment amounts.
Trended data includes your credit balances, minimum payment requirements and the amounts you paid on recent credit card statements. People who pay off their credit cards each month are referred to as transactors and are considered a lower credit risk to lenders. Trended data allows a credit scoring model to determine whether you are reducing, maintaining or increasing your balances over time. By paying your bills on time and paying off credit card balances, the FICO 10T score will reward you and save you money on interest fees.
How can Improve Credit LLC help?
Here at Improve Credit LLC, we treat you as if you’re family. We provide knowledge to consumers and lenders alike who are feeling the results of insufficient credit scores. We assist customers who need to establish credit, repair credit, and maintain excellent credit. Improve Credit is here to educate you or your loved ones and provide excellent service.
Be sure to schedule a free consultation today or reach out to us at (704) 877-8739. Between Credit Monitoring and Personal Credit Repair, we are here to educate and guide you on this financial journey. We look forward to hearing from you soon!