Fico Scoring Basics
FICO scoring originated from the Fair Isaac Company. Fair Isaac invented a credit scoring system that turns of all of your credit information into a personal credit score that lenders use to determine credit risk.
The term FICO scoring means, a credit score based on the Fair Isaac Company or FICO model. It's not only important to know your personal credit score or FICO score, but it's also important to have an understanding of how FICO scoring is determined.
FICO scoring is used by lenders in determining your interest rate on any loan you apply for.
If you're buying a house the types of mortgages available to you are based on your personal credit score.
FICO scoring is based on the FICO model and the interest you pay as well as your monthly payment determines what your personal credit score is.
The same is true when you get a car loan, as well as the premium on your car or homeowners insurance. Your personal credit score can even affect your chances of getting new employment.
FICO scoring is calculated from a lot of different credit data and it can be grouped into five different categories.
So that you will understand the basics of FICO scoring, the percentages below reflect how important each of the categories is in determining your personal credit score.
The largest factor in determining FICO scoring is your payment history. The number of unpaid bills you have, any bills sent to collection, bankruptcies etc. The more recent the problem, the lower your score.
FICO scoring is also determined by how much of the total credit line is being used on your credit cards or other revolving charges. High balances or more precisely, balances that are close to your credit limit can negatively affect your credit score. Most lenders think below 50% of maximum is ideal.
FICO scoring can also be affected by how long your accounts have been open. High loan amounts that you have paid as agreed and have had open a long time work best. Closing old accounts can have a negative affect because it makes your credit history appear shorter.
Every time you apply for credit of any kind, you create an inquiry on your credit report. A lot of inquiries can negatively affect FICO scoring. However, ordering a copy and checking your own credit report or personal credit score counts as a soft inquiry and does not go against your score.
Types of credit affect FICO scoring like what you owe on current mortgage loans, credit cards and finance companies compared with the original loan amounts. Also it's important not to open a number of new credit cards thinking it can increase your available credit. It will have the opposite affect and lower your personal credit score.
FICO scoring looks at all the categories of information, not just one or two. Lenders on the other hand will look at a lot of different things when they make a credit decision.
Your income, how long you have worked at your present job and the kind of credit you are requesting will always be a factor.
There are many things that will affect your financial future and FICO scoring plays a big role in how successful that future will be.
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