FICO Scores are one of the most common credit scoring models. These scores are used to assess risk for consumers and determine whether they should be granted a loan. 90% of lenders use at minimum one of the major versions of FICO Score. These scores are calculated from a consumer's credit report. This includes information about their credit history and payments. Scores are affected by many factors including the amount owed, length of time since an account was opened, and the mix of accounts that a person has.
FICO scores are usually calculated by running credit reports through an algorithm. This assigns different weights for different indicators. A lot of late payments can have a more severe impact than applying for new credit. However, the score is not calculated in the same way for all consumers. This means that each lender might have its own guidelines.
There are several versions of the FICO Score, with each model having specific industry-specific variations. FICO 8 is the most popular version used by financial institutions. FICO 5 or FICO 9 can be used by other financial institutions. While scores vary, they are based upon the same five elements.
Payment history is by far the most important factor in a FICO score. Lenders look for proof that borrowers are punctual with their payments. FICO scores may be positively affected if borrowers pay their bills on time. However, missing payments repeatedly can have a negative effect on your FICO score.
FICO Score 8 includes some important changes that might cause you reconsider your credit usage. First, it offers a better statistical representation on risk. One other change is that it's more open to single-time late payment. High credit card balances are also more important to it. With a credit card, you should aim to keep your overall credit utilization ratio below 30%.
Your credit score can be improved by adding authorized users to your cards. However, it can also become negative if you add strangers to your accounts. This is known to be "credit card pettybacking" and is not a good idea.
FICO Score 8.8 has changed how collection accounts are treated. The FICO Score 8 version no longer considers accounts that have less than $100 in balance. Long-term credit reports can suffer from the negative effects of collection accounts.
Even with the many changes, the FICO Score 8 is still the most commonly used score in the lending industry. Credit card companies and other lenders use it to evaluate a borrower's performance with credit card loans. A low credit score can impact your ability to obtain certain jobs or a mortgage.
FICO's scoring models are constantly being improved. All lenders can access the most current version of FICO Score. You can then choose which one you prefer.