Whenever you apply for a line of credit, a monthly expense, a new rental house, or even a job, it is likely that your credit score will be checked. It is important, therefore, that you know your own score so that you can determine whether or not you will be accepted. To do this, you need to look into your FICO status.
Learning all the factors that include credit score
The FICO Credit Score:
In this country, FICO is the most-used credit score provider. They have a process in which every individual has a score of at least 300, with an optimum score of 850. (Credit Karma) FICO stands for Fair Isaac & Co, which is the company that developed the system. There are numerous other systems in existence today, such as VantageScore (ranging from 501 to 990), and they are referred to as the “FAKO scores”. FICO, however, is the most trusted and relied upon, so knowing your personal credit score through them will give you a good indication of how likely it will be that you will be accepted for credit.
Essentially, a mathematical formula will determine whether or not you are credit worthy. Usually, those who have a rating of 720 or above will be accepted for most financial products. The lower the score gets, the higher the interest rates will be and the more difficult it becomes to get a loan at all. Indeed, since the Great Recession, it is rare for so-called “subprime” individuals to be able to get any kind of loan at all.
The Average FICO Rating:
The average national FICO rating now stands at 700 (Credit Karma), which is the first time it has reached this value. Around 40% of people score 750+, whereas 40% score 699 or lower. This means that there is still significant room for improvement. After all, the better your credit rating, the more likely it will be that you will get good financial products such as loans and mortgages.
Now that you understand the FICO score, you need to know how it is calculated. The original algorithm used by Fair Isaac is a closely guarded secret. However, it is known that it is worked out by looking at the credit profile developed by the three main credit reporting agencies (Equifax, Experian, TransUnion) based on the past seven years. These three agencies use their own complex algorithms, however, which further confuses the matter. Some financial organizations will also only look at the score of one of those three agencies, which is why they all have their own score name, such as:
- The Experian/Fair Isaac Risk Model for Experian
- The BEACON Score for Equifax
- The Empirica for TransUnion
These scores are used in the same way as the FICO score. However, they do not correlate with the VantageScore, which is the alternative to FICO that Equifax, Experian, and TransUnion also use.
Factors That Influence Your FICO Credit Score:
The information about you and your credit changes regularly. Each month, you may apply for new credit, you will make bill payments or miss them, your level of credit changes, and so on. This means that there are also significant differences in your scores. Additionally, the three agencies use different algorithms, which in turn means that the scores they come up with are not the same either. You also don’t know for sure whether each of the three agencies has a complete and accurate file on you.
That being said, there are a number of specific factors that influence your score. These are:
Your payment history, which influences around 35% of your score. New elements, which means credit obtained in the past two years, are the most important. The more you show yourself to be a reliable payer, meaning there is no bankruptcy, collection reports, or past due payments, the better your score will be.
- Your credit consumption, which influences around 30% of your credit score. This represents the level of credit you have, so your home loans, student finance, and consumer debt, and this is then matched to how much credit is available. Your balance should be between 0 and 10% of your overall credit for the best score.
- The span of your credit history, which influences 15% of the score. If you have held your credit for a long time and with the same company, your score will go up.
- The depth of your credit history, which influences 10% of the score. Essentially, the greater variation in your credit, the better your score will be.
- New requests for credit, which influence 10% of your score. If you have submitted a lot of requests for credit in a short period of time, it looks as if you are in need, and this lowers your score. You should, therefore, never apply for more than one type of credit (except car finance and mortgages) within a 45 day period.
Remember that the above indicates how FICO establishes your credit score. VantageScore, on the other hand, uses a different process altogether. While there is an overlap, there are significant differences as well. You also have to remember that the score is basically a snapshot of who you are as a debtor. It tells a financial institution how likely it will be that, if they lend you money, you will pay it back on time. Some people find this quite difficult to accept, because they do not want their life to be reduced to a number. Additionally, there is a degree of things being unfair in this as well. Those who have poor credit will be charged a higher interest rate, which means their payments will be higher and therefore will find it more difficult to meet their financial obligations, and that in turn could land them into greater difficulties. However, personal opinions on the credit score are completely irrelevant. They are computer calculated and they enable financial institutions to make decisions on the spot. The days of someone speaking to bank managers and hoping to convince them personally to provide them with a loan are long gone. Unless your score is good, there is no point in even applying.