Fair Issac Corporation or FICO is the most trusted and widely used credit-scoring model in the United States. A FICO score takes into account different aspects of your credit history, which are weighted based on their importance. In this post, we'll explore how FICO scores are calculated.
1. Payment History (35%): Your payment history is the most significant factor in calculating a FICO score. It reflects whether you have made payments on time and in full, how many late payments you have, and how long they were overdue. Late payments can have a substantial negative impact on your credit score.
2. Credit Utilization (30%): The amount of debt you owe compared to your available credit is known as credit utilization. It is an important factor in determining FICO scores. High credit utilization suggests that you are relying heavily on credit, which can reflect poorly on your creditworthiness.
3. Length of Credit History (15%): The length of your credit history is also crucial in calculating your FICO score. It includes factors such as the age of your accounts, the average age of your accounts, and the last time you used them. A longer credit history is generally seen as more favorable because it offers a more extended track record of credit use.
4. New Credit Accounts (10%): Opening new credit accounts can increase your overall available credit, but if not done responsibly, new accounts can negatively impact your credit score. Too many new accounts create a risk that you will not be able to pay back the borrowed money on time.
5. Credit Mix (10%): FICO Scores consider the types of credit accounts against the total number of accounts. A consistent mix of credit, including loans, credit cards, mortgages, and retail accounts, is good for your credit score.
In conclusion, FICO scores are calculated using a sophisticated method that combines information from different aspects of your credit history. To improve your FICO score, focus on making timely payments, lowering your overall credit utilization rate, maintaining a diverse mix of credit accounts over time, and reducing the number of new credit accounts you apply for. By taking control of your finances and understanding the factors that impact your FICO score, you can work towards achieving better financial health and improved creditworthiness.