FICO Score is one popular credit scoring model. These scores can be used by businesses and financial institutions to evaluate a consumer's risk level and decide whether or not to lend to them. In fact, 90% of lenders use at most one of the four major FICO Score versions. These scores are based on a credit report, which contains information about a consumer's credit accounts and payment history. 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.
A credit report is run through an algorithm that assigns different weights and indicators to calculate a FICO score. For example, applying for new credit frequently has more negative impact than a few one-off late payments. However, not all consumers will get the exact same score. This means that each lender may set its own guidelines.
There are many versions of FICO Score. Each model has its own 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. The scores can be different but they are all based on the five same factors.
Payment history is by far the most important factor in a FICO score. Lenders need to see proof that the borrower has paid their bills on time. Paying a bill on time every month can have a positive impact on a FICO score. However, missing payments repeatedly can have a negative effect on your FICO score.
FICO Score 8 is a major update that can cause you to reconsider how much credit you use. First, it provides a more accurate statistical representation of risk. Another change is that it is more forgiving of single-time late payments. 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%.
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 also known as credit card piggybacking and is not a good idea.
Final, FICO Score 8 has changed the way it treats collection accounts. The FICO Score 8 version no longer considers accounts that have less than $100 in balance. Collection accounts can have a negative impact on a credit report for a long time.
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. You may not be able to get certain jobs, or apply for a mortgage if you have a low credit score.
FICO's scoring models are constantly being improved. All lenders have access and can use the latest version FICO Score.