One of the most popular credit scoring models is the FICO Score. These scores are used by financial institutions as well as businesses to assess the risk of a consumer and determine whether or not to grant a loan. 90% of lenders use at minimum one of the major versions of FICO Score. These scores are based upon a credit report that contains information about the consumer's credit history and credit accounts. There are several factors that can affect the score.
FICO scores are typically calculated by running a credit file through an algorithm. The algorithm assigns different weights or indicators different weights. Applying for new credits frequently can have more negative consequences than just a few late payments. However, scores are not calculated the same for everyone. 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 can be used by financial institutions. FICO 5, FICO 9, and FICO 6 are also available. While the scores are different, they are based on the same five factors.
FICO scores can only be calculated if you have a good payment history. Lenders are interested in knowing that borrowers have made their monthly payments on time. A positive effect on a FICO score can be achieved by paying a bill on-time every month. Recurrently missing payments can lead to a negative impact on your FICO score.
FICO Score 8 is a major update that can cause you to reconsider how much credit you use. It gives a better statistical representation about risk. One other change is that it's more open to single-time late payment. It is more sensitive to high credit cards balances. Your credit card should have a minimum of 30% credit utilization.
Although adding authorized users to credit cards can have a positive effect on your score it can turn negative if your account is filled with strangers. This is called "credit card piggybacking", and it is not a good idea.
The FICO Score 8 version has made some changes to how it handles collection accounts. Collection accounts with balances below $100 are not taken into account by FICO Score 8. Credit reports can be affected for a long duration by collections accounts.
Despite the many changes, FICO score 8 is still the most popular score in the lending industry. Credit card companies as well as other lenders use this score to evaluate the borrower's credit card loan performance. If you have a low score, it could impact your ability to get certain jobs or make a mortgage.
FICO is constantly tweaking its scoring models. All lenders have access and can use the latest version FICO Score.