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FICO Credit score


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FICO score
The best-known and most widely used credit score model in the United States, the FICO score is calculated statistically, with information from a consumer's credit files. The letters stand for Fair Isaac Corporation. It provides a snapshot of risk that banks and other institutions use to help make lending decisions. Applicants with higher FICO scores might be offered better interest rates on mortgages or automobile loans as well as higher credit limit amounts.

Makeup of the FICO score

The approximate makeup of the FICO score used by US lenders:

Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:

35%: Payment historyLate payments on bills, such as a mortgage, credit card or automobile loan, will cause a FICO score to drop. Bills paid on time will improve a FICO score.

30%: Credit utilizationThe ratio of current revolving debt (such as credit card balances) to the total available revolving credit or credit limit. FICO scores can be improved by paying off debt and lowering the credit utilization ratio. Alternatively, applications for and receiving the credit limit increase will also drive down the utilization ratio. Alternatively, opening new lines of credit will have the same effect (keep in mind the "Average age of tradelines" and "Hard inquiries" matrices on the last possibility). The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on a FICO score; if it is an old account being closed, the resultant decrease in average age of open accounts will also cause a decrease in score.

15%: Length of credit historyAs a credit history ages it can have a positive impact on its FICO score.

10%: Types of credit used (installment, revolving, consumer finance, mortgage)Consumers can benefit by having a history of managing different types of credit.

10%: Recent searches for credithard credit inquiries, which occur when consumers apply for a loan (revolving or otherwise), can hurt scores, especially if done in great numbers; often three to five points per inquiry. Individuals "rate shopping" for a mortgage or auto loan over a short period (a fortnight or 45 days, depending on whether old FICO or FICO 08 are used) will likely not experience a large decrease in their scores as a result of these types of inquiries, as automated computer algorithms attempt to detect when a consumer is rate shopping (and not attempting to receive many new lines of credit), and roll all of the hard inquiries in to one; this can often take several months, and isn't always effective, although a consumer who believe they have received many hard inquiries on their report while searching for one loan (where the automated system has failed to detect it as such) can dispute these with the credit bureau in question.[11] While all credit inquiries are recorded and displayed on personal credit reports for two years (their effect decreases at the six-month and one-year mark; they have no real effect after the first year), credit inquiries that were made by the consumer (such as pulling a credit report for personal use), by an employer (for employee verification) or by companies initiating pre-screened offers of credit or insurance do not have any impact on a credit score: these are called "soft inquiries" or "soft pulls", and do not appear on a credit report used by lenders, only on personal reports.

Getting a higher credit limit can help your credit score. The higher the credit limit on the credit card, the lower the utilization ratio average for all of your credit card accounts. The utilization ratio is the amount owed divided by the amount extended by the creditor and the lower it is the better your FICO rating, in general. So if you have one credit card with a used balance of $500 and a limit of $1,000 as well as another with a used balance of $700 and $2,000 limit; the average ratio is 40 percent ($1,200 total used divided by $3,000 total limits). If the first credit card company raises the limit to $2,000; the ratio lowers to 30 percent; which could boost the FICO rating.

There are other special factors which can weigh on the FICO score. Any money owed because of a court judgment, tax lien, etc. carry an additional negative penalty, especially when recent. Having one or more newly opened consumer finance credit accounts may also be a negative.

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FICO Credit score