CandleFocus Glossary Editor
FICO scores are one of the most common methods used by lenders to evaluate an individual’s creditworthiness. Developed by the Fair Isaac Corporation (FICO) in 1989, the scoring model helps lenders determine an individual’s credit history, capacity and behavior. FICO scores are used worldwide and are generally accepted as the benchmark for creditworthiness.
FICO scores range from 300 to 850, with scores in the 670 to 739 range generally considered to be “good” scores. A score of 740 or higher is seen as an excellent score, and borrowers may qualify for the lowest interest rates on loans. On the other hand, scores in the 600 range and below may be seen as a poor score, and those with scores in this range may not be able to get the best loans. As the economy continues to improve and credit requires become tighter, lenders are increasingly looking for higher FICO scores in loan applicants.
The FICO scoring methodology encompasses five key factors: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%) and new credit (10%). These five factors are all taken into consideration to determine an overall score that lenders then use to gauge the creditworthiness of loan applicants.
Payment history indicates how well an individual has managed their past debts, and accounts for the largest percentage — 35% — of a FICO score. It’s important to ensure you pay all your credit card bills and loan payments on time and keep balances low. If you have delinquent debt, it could lower your FICO score.
Credit utilization, or how much credit you’ve been using, comprises 30% of a FICO score. Lenders prefer individuals who stick within a 30% credit utilization ratio (the amount of available credit utilized on all open lines of credit). So, for example, if you have a total credit limit of £6000 and you have used £1800 of that credit, then you have a 30% credit utilization ratio and will fall within the preferred credit utilization range for most lenders.
The length of credit history is important, as longer credit histories show lenders that you have a certain level of experience handling your finances responsibly. This category is worth 15% of a FICO score.
Credit mix and new credit comprise 10% each of a FICO score. Credit mix looks at what types of credit you have, such as installment loans, mortgages, retail accounts and credit cards. New credit looks at any new credit lines opened and can increase your score, as it shows lenders that you are able to manage multiple different types of credit successfully.
FICO scores are essential to understanding an individual’s creditworthiness. It’s important to maintain a good FICO score by making payments on time, using less than 30% of your available credit and having a mix of different types of credit. If you do this, then you may be able to maintain good credit and get the best interest rates on loans. The FICO scoring methodology was recently updated to FICO Score 10 Suite – make sure to stay up to date on these changes for your best credit score possible!
FICO scores range from 300 to 850, with scores in the 670 to 739 range generally considered to be “good” scores. A score of 740 or higher is seen as an excellent score, and borrowers may qualify for the lowest interest rates on loans. On the other hand, scores in the 600 range and below may be seen as a poor score, and those with scores in this range may not be able to get the best loans. As the economy continues to improve and credit requires become tighter, lenders are increasingly looking for higher FICO scores in loan applicants.
The FICO scoring methodology encompasses five key factors: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%) and new credit (10%). These five factors are all taken into consideration to determine an overall score that lenders then use to gauge the creditworthiness of loan applicants.
Payment history indicates how well an individual has managed their past debts, and accounts for the largest percentage — 35% — of a FICO score. It’s important to ensure you pay all your credit card bills and loan payments on time and keep balances low. If you have delinquent debt, it could lower your FICO score.
Credit utilization, or how much credit you’ve been using, comprises 30% of a FICO score. Lenders prefer individuals who stick within a 30% credit utilization ratio (the amount of available credit utilized on all open lines of credit). So, for example, if you have a total credit limit of £6000 and you have used £1800 of that credit, then you have a 30% credit utilization ratio and will fall within the preferred credit utilization range for most lenders.
The length of credit history is important, as longer credit histories show lenders that you have a certain level of experience handling your finances responsibly. This category is worth 15% of a FICO score.
Credit mix and new credit comprise 10% each of a FICO score. Credit mix looks at what types of credit you have, such as installment loans, mortgages, retail accounts and credit cards. New credit looks at any new credit lines opened and can increase your score, as it shows lenders that you are able to manage multiple different types of credit successfully.
FICO scores are essential to understanding an individual’s creditworthiness. It’s important to maintain a good FICO score by making payments on time, using less than 30% of your available credit and having a mix of different types of credit. If you do this, then you may be able to maintain good credit and get the best interest rates on loans. The FICO scoring methodology was recently updated to FICO Score 10 Suite – make sure to stay up to date on these changes for your best credit score possible!