FICO fundamentals
When making financial decisions, consider the key elements that determine your FICO score
A FICO score is the scoring model most widely used by lenders. It is a three-digit number that ranks you based on the risk involved in lending you money. The higher your FICO score, the more likely you will be approved to borrow money at favorable terms. A FICO score can range from 375 to 900. Good Credit Risk - A FICO score of 650 or more is considered a “good” credit risk to lenders. However, some lenders may use 680 as a cut-off score. A high FICO score will ease the process for you when you borrow money and can sometimes lower the interest rate that lenders charge you. Average Credit Risk - If you have a score between 620 and 650, you are considered an “average” credit risk. However, this range varies; some lenders may use a range of 650 to 679. When you borrow money with a FICO score in this range, the approval process will be easier than for “poor” credit risks, but there still may be delays, as lenders will be careful to verify your income and assets. Poor Credit Risk - Creditors will consider you to be a “poor” credit risk if your score is below 620. However, some lenders may use a cut-off score of 649. With this FICO score, you may be denied loans and credit cards, be asked to provide a cosigner or be required to pay a higher interest rate. You can also expect that the process of approving you for credit, even at higher interest rates, will be lengthy and complicated.
How Is a FICO Score Determined?
The score is derived from a statistical model that incorporates all of your credit information from the last seven years. There are five main components of your credit report that are used to determine your FICO score. 1.
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Payment History: Is the most important component of your credit report Details your payment of specific loans, such as on-time payments, and lists judgments or bankruptcies as well as other positive or negative comments Amounts Owed: Is the second most important component of your credit report Shows the total level of your outstanding debt Lists the number of open accounts you have Lists the percentage of debt you have, as compared to the maximum permitted by your lenders or credit cards Length of Credit History: Outlines the length of your relationships with creditors Shows your oldest open account Tracks the years in which you have maintained a positive credit history New Credit: Is given considerably less weight than the other factors outlined above Details how many times and how often you have sought to increase your credit Types of Credit in Use Not all debt is looked at the same School and car loans are viewed with much more favor than unsecured consumer debt Unsecured consumer debt, such as credit cards, are considered less prudent
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