September 8, 2020
There are many different forms of credit scores that are used by banks, lenders and financial institutions every day. But FICO, or Fair Isaac Corporation, is one of the most popular for analyzing consumer credit data and using it to formulate a score that predicts credit risk.
FICO Ratings are used in over 90% of all loan decisions in the United States, making them by far the most popular and widely used credit scores!
Your FICO score is determined based on data from your credit reports.
FICO is based on data collected, organized and managed by the three major credit bureaus in the United States, TransUnion, Experian and Equifax.
These credit bureaus not only record your personal information like your name, social security number, address, etc.
FICO uses data from these three bureaus to calculate your credit score, although there are several variations of FICO scores and the information provided by each credit bureau may differ slightly. While we don’t know the exact complex algorithm that FICO uses to calculate your score, they do share a basic version that breaks down five main factors that influence your FICO score.
This information is so important because a good FICO score will help you save money, access lower interest rates, and generally give you better debt and loan financing options.
So what goes into your FICO score? No matter how different our financial situation is, our FICO scores are all calculated in exactly the same way, based on five broad categories of consumer credit behavior.
5 factors that go into your FICO score:
1 Payment history – 2 Amounts due – 3 Duration of credit history – 4 New credit – 5 Composition of credit.
FICO also lets us know approximately how well each of these categories is factored into the scoring, as they are not weighted equally. For example, payment history is the most important factor for the FICO score, which represents around 35% of your individual score.
How much do these factors influence your FICO score? 35% Payment history 30% Amounts owed 15% Length of credit history 10% New credit 10% Credit mix, of course all of these factors interact and go up and down all the time as consumers do things like make their mortgage payment on time, maximize their credit cards, have a collections account or take out new loans.
But everyone’s FICO calculation is a little different Also, keep in mind that this is an oversimplification and that everyone’s credit image is dynamic and treated differently. For example, someone with a great FICO score (like a 750) may see their score take a bigger hit if they miss a payout than someone with a lower than average score, like a 620, if they do the same. FICO’s algorithm takes all of this into account, as their intention is to assess the future risk of default by creditors and lenders.
Here’s a breakdown of these five factors that make up your FICO score:
Payment history (35%)FICO places great importance on your payment history because your history of paying on time is (of course) the biggest predictor of future payment behavior. Therefore, payment history typically accounts for over a third of your score, and making payments on time (and in full) is crucial to maintaining a great FICO.
Amounts due (30%) Another important factor in calculating your credit score is the amount you owe. It’s not necessarily the total amount of debt you owe that can improve or reduce your score, but the ratio of your debt balances to the total credit available for that account (usage). When banks and lenders find that you are at your max and have used most or all of your available credit, it is a signal to them that you are having financial problems or that you are not a good steward of your finances. , so keep your balances low and not maximum credit cards.
Length of credit history (15%) FICO looks for well-established accounts that have been open for some time, rewarding a seasoned history with a higher credit score. Of course, it’s possible that people with newer credit accounts have a top-notch FICO score, or consumers with long-standing accounts have a low score (especially if they’ve missed payments). But, in general, FICO likes to see old accounts, longer since you opened your new account and active use of accounts.
Credit composition (10%)FICO scoring algorithms reward a well-balanced mix of accounts on a consumer’s profile, such as a mix of credit cards, installment loans, mortgages, etc. In fact, your credit mix can represent around 10% of your credit score.
New credit (10%) Your use of new credit factors in your FICO score, although only around 10%. For example, if you suddenly start applying for several new credit cards and loans, it may be considered risky financial behavior and as a result your score may drop. *** To read the rest of our recent Amazon.com Bestsellers Guide, A FICO Scores Snapshot, FREE, click
Special thanks to BlueWater Credit and Norm Schriver for this great contribution to MyFolsom.com – For more information or to see how BlueWater can help you contact them at
311 Judah Street Suite 200 Roseville, CA 95678 USA, call (916) 315-9190 or find them on the web at www.bluewatercredit.com