This Is How a FICO Credit Score Is Calculated
Just about everyone has had to rely on their credit score for one reason or another. Whether it be a house, car, personal loan, etc., we have all been confronted with the reality that we are at the mercy of our loan worthiness. What you may not know is that scores differ. Companies like Equifax, Transunion, and Experian us the Vanguard scoring system. However, another credit score is the FICO score.
A FICO score is calculated based on 5 categories:
- Payment history – 35% – your payments which are made on-time divided by the total number of payments expected.
- Amounts owed – 30% – the total amount you owe across all loans/debts.
- Length of credit history – 15% – the age (months or years) of your oldest line of credit.
- New credit – 10% – new credit inquiries.
- Credit mix – 10% – the proportion of loans to credit card debt to student loans, etc.
As you can see, each category is weighted in terms of importance or effect on your overall FICO score. Additionally, the weight can change based on the person. For example, if you have mostly new credit, the “new credit” category will weigh more heavily on your overall score.
An important note about the FICO score: when the score is being calculated, only the information in your credit report is considered; not your income or any other personal information.
How is the FICO score different from other scores?
The FICO score is unique. Different FICO scoring models are used for different purposes. If you are applying for a credit card, the FICO scoring model is different than if you were applying for a mortgage loan.
FICO is taking it a step further in the near future. When the Ultra FICO score is released, a person’s banking information will be taken into account when the score is generated. This should help lenders better understand potential customers with limited or bad credit. The more information the lenders have, the more comfortable they can be when considering whether or not to lend to a customer.
This is why the type of score matters
The type of score a lender uses can be far from trivial. FICO scores can be vastly different from other scores. The ramifications can be devastating. For example, if you are applying for a mortgage loan and FICO says your score is 780 while Experian says it is 720, your interest rate can change by a full percentage point. Keeping with this example, that could raise the total interest you pay over life of a 30-year loan by $25,000 to $30,000.
Who uses the FICO scoring model?
The FICO score is widely accepted as the gold standard. It is estimated that 90% of lenders use this system. If you are considering a lender that does not use the FICO scoring model, you may consider asking them to use it. Every point counts when calculating this life-altering score.
If you are buried in high-interest debt, you need help. You do not have to live at the mercy of creditors, banks, and collectors. Dsouza and Strachan Legal Group has been helping people just like you break free of the grip of predatory lenders. Contact Dsouza and Strachan today for a free consultation.