FICO Score. Everything you need to know.

fico score

The FICO score is a benchmark of consumer credit risk, primarily used by consumer lenders in the US. Its a type of credit score that lenders refer to for evaluating the credit risks associated with an individual. FICO score would tell them if it is safe to extend credit to someone with a certain FICO score. The FICO score has been created by the California-based analytics software company, Fair Isaac Corporation. To know what a FICO score is, please read on.

FICO score examines various factors in five different areas to judge the creditworthiness of an individual including his payment history and current indebtedness.

FICO Scores

FICO scores range from 300 to 850, with those having above 650 considered having a very good credit track record and those with 650 considered to have higher credit risk. The lenders normally take FICO scores into account before lending, but they also consider other factors such as how long the borrower has been in his current job, type of loan sought, and his income. 

FICO scores are the most widely used benchmark by banks and lenders than any other model of determining the creditworthiness of the borrowers. While borrowers can always explain why their FICO score is not satisfactory, it remains a major deal-breaker with many lenders in the US.

Many lenders stick to a minimum FICO score for extending credit. They are so particular about the score that the credit can be denied if the FICO score is even one point below the threshold. This makes it necessary for everyone to improve their FICO score to enhance their creditworthiness. No other standard or model is taken as seriously as the FICO score when deciding to grant credit.

Maintaining a high FICO score demands a mix of credit accounts and flawless payment history. The borrowers should maintain a healthy balance in their credit cards. Late payment, maxing out and seeking new credit without appropriate planning are the things that contribute to low FICO scores.

Key Points

  • FICO scores are credit scores that evaluate and quantify an applicant’s creditworthiness.
  • FICO scores vary from 300 to 850, with scores below 620 considered subprime by many lenders.
  • The methodology employed to work out FICO scores are upgraded from time to time, the latest being version 8 introduced in 2009.

How FICO Scores are Calculated

FICO uses different formulas to work out FICO scores for each individual. They do this by attributing different mileage to different parameters of examining creditworthiness. However, in general, payment history gets the maximum mileage of 35%, followed closely by credit accounts owed at 30%. The duration of credit history gets 15% while new credit and credit mix get 10% each.

Factors that determine the FICO score are:

Payment History

FICO examines if an individual has been paying his credit accounts on time. The credit report lists out all lines of credits and the payment history. In particular, it shows whether the payments made 30, 60, 90, 120 or more days later.

Accounts Owed

This refers to the total money that an individual owes. A huge amount of credit does not necessarily mean low FICO score, which in fact is determined by examining how much of the credit limit that an individual has exhausted. If he has exhausted all the limits including maxing out the credit cards, his FICO score would below. But even after taking huge loans, if he still has a good deal of credit left, his FICO score would be higher.

Duration of Credit History

FICO would look at the total length of the credit history — the longer the better — provided other factors are favorable. However, people with even a relatively small period of credit history may have a good FICO score if all other factors are favorable. The duration of credit history is worked out by examining the duration of the oldest and the newest credit accounts, and the overall average.

Credit Mix

FICO also looks at the types of credit accounts that an individual hold. For a good FICO score, it has been a good mix of all available types of credit accounts, e. g., retail accounts, vehicle loans, mortgages, credit cards, others.

New Credit

FICO would examine if the individual has opened a slew of new credit accounts in a small period of time. This shows greater risks to credit and, therefore, the FICO score would below.