One of the most popular credit scoring models is the FICO Score. These scores are used to assess risk for consumers and determine whether they should be granted a loan. 90% of lenders use at minimum one of the major versions of FICO Score. These scores are based on a credit report, which contains information about a consumer's credit accounts and payment history. Scores are affected by many factors including the amount owed, length of time since an account was opened, and the mix of accounts that a person has.
Typically, a FICO score is calculated by running a credit report through an algorithm, which assigns different weights to different indicators. Applying for new credits frequently can have more negative consequences than just a few late payments. However, scores are not calculated the same for everyone. This means that every lender could have its own guidelines.
There are many FICO scores, each one with specific industry-specific variants. FICO 8 is the most popular version used by financial institutions. FICO 5 or FICO 9 can be used by other financial institutions. The scores can be different but they are all based on the five same factors.
FICO scores are most influenced by payment history. Lenders are interested in knowing that borrowers have made their monthly payments on time. FICO scores can improve if you pay your bills on time each month. A negative impact will be caused by repeatedly missing payments.
FICO Score 8 is a major update that can cause you to reconsider how much credit you use. First, it gives a better statistical representation of risk. It's also more open to single-time late payments. High credit card balances are also more important to it. Your credit card should have a minimum of 30% credit utilization.
A positive impact on your credit score is having authorized users added to your credit card. But, it can get negative if strangers are added to your accounts. This is what is known as "creditcard piggybacking", which is a bad idea.
The FICO Score 8 version has made some changes to how it handles collection accounts. It no longer takes into account accounts sent to collection agencies that have a balance below $100. Credit reports can be affected for a long duration by collections accounts.
Despite many improvements, FICO Score 8 continues to be the most used score in credit lending. Credit card companies as well as other lenders use this score to evaluate the borrower's credit card loan performance. Your ability to get mortgages or work could be affected if your score is low.
FICO is always improving its scoring systems. The latest version of the FICO Score is available to all lenders, allowing you to choose which one you want to use.