What is FICO score and what is its importance?
Fair Isaac Corporation (FICO) is a publicly traded corporation that has created the best known credit score model. Your FICO score is calculated statistically on the basis of the information from your credit records. Usually, your score is represented between 300 and 850. Go through the following lines to know about FICO credit score in details.
FICO credit score formula
The credit score formula that FICO uses is top secret; however, the company gives an overview of the components (along with their respective percentage) that are used to calculate your FICO score. There are 5 key components, which are:
1. Your owed amount (30%): The scoring model examines how much amount you owe to your creditors. It is calculated by examining the installment balances in comparison to your original loan amounts.
2. Your payment history (35%): Your payment history determines whether or not you’re able to repay your debts on time. It takes into consideration several different types of accounts, such as, retail accounts, credit cards and installment loans.
3. Your credit history’s length (15%): It is calculated on the basis of the oldest credit account in your credit file; the oldest the better. Therefore, think twice before closing an account.
4. Types of credit (10%): While calculating your score, FICO considers the types of credit accounts that you have. It is better if you’re able to balance a mix of credit accounts.
5. New credit (10%): It is calculated on the basis of new credit accounts that you’ve established. It takes into consideration the length of your credit accounts, number of accounts, recent requests for your credit report and any hard inquiries made by your creditors.
Importance of your FICO score
Your FICO score speaks of your creditworthiness. With the help of this score, the lenders try to predict whether or not you’ll be able to repay a loan on time. If you have a good score (above 720), then you’ll be able to enjoy favorable terms and conditions on your loan. Therefore, it can be said that your score affects your lifestyle.
How to improve your FICO score
Here are 4 tips that’ll help you to improve your FICO score.
• Pay your bills on time and stay current on your payments.
• Keep the documents of your closed credit accounts; you may require them for future reference.
• Do not open any new credit accounts before applying for a big loan amount.
• Manage your credit card responsibly; do not exceed your available credit limits.
There are mainly 3 credit reporting agencies in USA, namely Equifax, Experian and TransUnion. They use FICO scoring model to calculate your credit score. You can view your FICO score from these agencies except Experian; it has stopped offering this service. However, your lenders will be able to view your score from Experian. It is advisable that you check your credit reports at regular intervals so that you’re able to correct mistakes, if any.