FICO credit score or Fair Isaac Corporation (FICO) allows lenders to analyze credit risk and help decide whether to issue credit and other information on their credit reports.
FICO scores use data from five areas: payment history, the current amount of indebtedness, categories of credit used, duration of credit history, and new credit accounts to assess a borrower’s creditworthiness.
Explaining the fundamental factors of your FICO credit score can help you understand how lenders evaluate your creditworthiness. Learn more.
How FICO Credit Scores Work
In 1989, FICO scores were introduced. The firm calculates credit scores for individuals based on information provided in their credit reports. Lenders then use these scores to assess each consumer’s creditworthiness and decide whether to approve their applications for credit cards, loans, and other forms of borrowing.
FICO ratings vary from 300 to 850, with 850 being the highest possible score. The higher your credit score, the higher the chances you will get approved for loans and lines of credit with the lowest interest rates.
The Fundamental Factors of Your FICO Credit Score
Payment History (35%)
An individual’s payment history relates to whether or not they pay their credit bills on schedule. Credit reports record bankruptcy or collection issues and any late or missing payments for each line of credit.
Accounts Payable (30%)
Accounts owing refers to the amount of money owed by a person. Having a lot of debt does not always imply having a bad credit score. Rather, FICO examines the amount outstanding about the amount of credit available.
For example, an individual owes $10,000. However, they have all of their lines of credit completely stretched, and all of their credit cards maxed out and may have a poorer credit score than someone who owes $100,000 but has no accounts nearing the maximum.
Credit History Length (15%)
Generally, the longer a person has had credit, the higher their score. Even someone with a short credit history might have a good credit score if they have strong ratings in other areas. FICO ratings include the age of the oldest account, the age of the newest account, and the overall average.
Credit Mix (10%)
The credit mix is the number of accounts. Individuals with good credit scores must have a diverse portfolio of retail accounts, credit cards, installment loans (signature or auto loans), and mortgages.
New Credit (10%)
Accounts that have recently been opened are called “new credit.” If a borrower opens many new accounts quickly, it signals risk and decreases their credit score.
Final Verdict
The FICO credit score is a popular measure for determining a borrower’s creditworthiness. While a low FICO score might be troubling, you can increase it by borrowing wisely and making timely payments. Using a cashback website like the Great Canadian Rebates can help you save money on purchases and allow customers to maintain good credit. Contact us for more details.