FICO SCORE: All You Need to Know

All you need to know about the FICO score

The FICO score is a scoring system employed by lenders to assess the creditworthiness of an individual. The FICO program is a scoring methodology that quantifies and evaluates an individual’s financial soundness. The FICO score has widely been adopted as the standard by financial institutions across America and globally. It comprises a range of scores expertly deduced from five critical elements drawn from a person’s credit profile.

Who uses the FICO score?

It is noteworthy to say that more than 90% of the credit decisions made across America rely on the FICO calculation. When you apply for an auto loan, a mortgage, credit card or personal loan chances are the lenders are looking at your FICO score. The FICO score is vastly relied upon as a true reflection of solvency to the extent that a single point below the set threshold can lock you out of a mortgage deal. Other considerations such as the amount of income, the employment duration, and the type of funding applied for are equally important but are a pale shadow in prominence when compared to the FICO score.

The FICO score is designed to reflect creditworthiness and credit risk by a carefully crafted data analytics formula that blends the five main factors that affect credit using different weight proportions. These five elements are; the history of payment, amount owed currently, length of credit history, the credit mix, and new or latest credit. As earlier mentioned, these elements’ contributions to the final FICO score are not uniformly distributed as they carry varying weights. 

What does FICO mean?

FICO is a scoring tool that was created by California-based Fair Isaac Corporation hence its name FICO.

How many FICO scores are there?

FICO has about 50 scores. All of these FICO scores are calculated differently and used by lenders to look at different aspects of your credit. For example, if you are applying for an auto loan lenders will look at your FICO Auto Scores. The most commonly used FICO score is FICO Score 8. You can login to myFICO for more information about your FICO score.

Related: Best Credit Score Apps

What is a good FICO score?

As a computer business software, the FICO credit program uses continuously updated facets and the most recent FICO 10 credit solutions Suite. This program generates an individual’s credit profile as a range between 300 to 850 points. This range is then categorized further to indicate where an individual lies as a creditworthy person or a credit risk individual.

Any score below 580 is considered a poor score

580 to 669 is considered fair

670 to 739 is good credit

740 to 799 is very good and is a mark of a dependable borrower.

Any score above 800 is excellent and indicates that the individual is an exceptional borrower.  

If you have a poor credit score you can fix your credit yourself and that can help you apply for better loans.

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What is a good FICO score to buy a car?

To get a good deal on an auto loan and at a good interest rate, the ideal FICO score should be 700 or above.

Related: What Is The Average Credit Score For Auto Loans

What is a good FICO score to buy a house?

In order to buy a home, your FICO score will determine on what loan you will be applying for.

If you are applying for an FHA (Federal Housing Administration) loan requiring 3.5& down payment your score needs to be 580 and up. FHA loans are less risky and easier to qualify for than conventional loans.

If you are applying for a Conventional mortgage loan your score should be 620 and up. A conventional mortgage is a home loan that follows the standards set by Fannie Mae and Fannie Mac.

With a VA loan (Veterans Affairs) no minimum score is needed but some lenders, such as Quicken Loans, do require a minimum FICO score of 620. VA loans are for U.S military members and veterans.

Related: 5 Ways To Increase Your Credit Before Applying For A Loan

How is FICO calculated?

Each factor carries a certain weight in the final FICO score, as outlined below

  • History of payment, 35%

The most significant chunk of the FICO score depends on your previous culture of servicing credit. A positive score is reserved for those who borrow and repay, and pay on time above all. Whenever a delay in payment occurs, it is crucial to note that the delay duration is a determinant. History of payment would hamper the score negatively in case of negative information such as bankruptcy, skipped or missed payment, and collection details of unpaid debts. 

  • The amount owed, 30%

This feature takes the second slot as the most critical consideration. It refers to the amount of money the individual owes. The FICO score calculates this by using a utilization ratio. This ratio refers to the average of the money owed and the available credit. It helps not if the utilization is zero. It is okay to borrow but not to exhaust the available credit. A healthy balance between the amount owed and the maximum available credit is the point to note. 

  • Length of credit history, 15%

A long history of credit indicates a longer relationship with lenders and service-providing companies. However, that long period should be without adverse incidences for that to impact the FICO positively. Ten years of credit history can be wasted if it is blotted with bankruptcy notices and debt collection demands. FICO considers how long the individual’s oldest account has existed, the newest account’s age, and their average.  

  • Credit mix portfolio, 10%

A healthy mix of various credit accounts can boost the FICO score. These include Retail accounts, mortgage, student loan account, car loan account, insurance, and related facilities 

  • New credit, 10%

Whenever an individual opens a new credit account, it signals risk and lowers the FICO score. A new account is taken to reflect a tendency by individuals to open new accounts to accumulate new debt, or it can imply financial difficulties due to cash flow deficiency 

The FICO score is the preferred tool for assessing an individual’s creditworthiness. Other issues could be considered, but the FICO is the most significant and central to every other consideration. FICO is a cocktail that draws its final score from the five factors that affect credit, and any score above 670 is considered creditworthy. 

Related: Credit Karma vs FICO Score

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