The FICO Score is one of the most widely used credit scoring models. These scores are used by financial institutions and businesses to determine whether to approve a loan application. 90 percent of lenders actually use at least one major version 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.
A credit report is run through an algorithm that assigns different weights and indicators to calculate a FICO score. Applying for new credit more often than paying late fees can have a negative effect. However, not all consumers will get the exact same score. This means that each lender might have its own guidelines.
There are many FICO scores, each one with specific industry-specific variants. 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. FICO scores can improve if you pay your bills on time each month. On the other hand, repeatedly missing payments will have a negative impact.
FICO Score 8 has some major changes that may cause you to reconsider your credit usage. First, it offers a better statistical representation on risk. It's also more open to single-time late payments. It is also more sensitive to high credit card balances. Credit cards should be used to limit your credit utilization ratio to 30%.
While adding authorized users on credit cards can improve your score, it can lead to negative consequences if you begin adding people to your accounts. This is called "credit card piggybacking", and it is not a good idea.
Lastly, the FICO Score 8 version has changed how it treats collection accounts. Collection agencies with less than $100 balances are no longer eligible for FICO Score 8. Collection accounts can have a negative impact on a credit report for a long time.
Even with the many changes, the FICO Score 8 is still the most commonly used 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. Low credit scores can affect your ability to apply for certain jobs and get a mortgage.
FICO is continually improving its scoring models. All lenders can access the most current version of FICO Score. You can then choose which one you prefer.