I recently came across a report issued by FICO, the preeminent credit scoring agency in the world, entitled “Understanding FICO Scores: What you need to know about the most widely used credit scores.”
In order to further educate you about FICO and how you can keep a great credit score, today I’ll summarize some of the high points from that report.
- According to FICO, their model of credit scoring is used in over 90% of U.S. lending decisions, from banks to credit cards, mortgage lenders to auto loans, and just about everything in between.
- FICO scores help these financial institutions gauge the risk of lending to a potential borrower, as there’s a direct correlation between a consumer’s credit score and the likelihood that they’ll default on debt in the future.
- Every single day, lenders across the U.S. rely on FICO scores to help them make lending approvals or denials. In fact, 10 billion FICO scores are accessed every year by lenders and financial institutions, which means 27 million entities are looking at our collective credit scores every day!
- Depending on FICO’s data, lenders will also use the information to determine what terms, programs, and interest rates the borrower will qualify for.
- FICO scores range from 300 to 850 (although there are different models that range from 250 on-up, etc.). The higher your credit score number, the better, and borrowers with FICOs 720 to 740 or above are usually considered excellent candidates for new loans.
- However, not everyone has top-of-the-line credit. In fact, FICO reports that the average credit score among U.S. consumers is 695, which falls in the category of Good but certainly not Great.
- You also have more than one FICO score, as the preeminent credit scoring company in the world adjusts their scoring models based on different needs. For instance, your score may be 726 if an auto lender pulls it up, but 738 if a mortgage broker does the same, and, still, 723 when a credit card company accesses your score.
- FICO Score 9 is the newest version, which will roll out next year and is expected to be the biggest evolution of credit scoring in twenty-five years.
- According to FICO, their new FICO Score 9 model won’t consider third-party collections, give less weight to unpaid collections from medical debt, and allow rental history to be used to positively influence your credit score.
- Between the Big Three credit bureaus (Experian, Equifax, and TransUnion), there are at least 28 FICO scores that are regularly used! While this may seem confusing, the average consumer doesn’t need to worry about managing that, since sound financial practices will improve all scores accordingly.
- Keeping a strong FICO score isn’t only a number on paper, nor is it only about being approved or denied for your next loan. A better FICO will help you save a lot of money when it comes to your mortgage, auto loan, student loans, credit cards, etc. and even insurance, rent, cell phone accounts, and utilities.
- For instance, FICO shows the example of two home buyers that are applying for a mortgage for the same house at the same price, but with two different FICO scores.
On a 30-year fixed home loan with a $280,000 loan amount,
620 FICO score
$1,517 monthly payment
$266,055 in total interest paid
760 FICO score
$1,256 monthly payment
$172,131 total interest paid
In this case, making sure you have an excellent FICO actually saves you not only $261 per month, but $93,924 over that 30-year span! That’s almost $100,000 in savings just because you have a better credit score!
- So, how do you build and maintain an excellent FICO credit rating?
There are five key ingredients that make up your credit score. The good thing is that FICO not only tells us what these are but assigns a specific percentage to each, so we know which factors are the most important.
Payment history (35%)
Amount of debt (30%)
Length of credit history (15%)
New Credit (10%)
Credit Mix (10%)
- The good news is that you also don’t have to be a bank or lender to see your credit score, as FICO allows you to see your own score at FICO.com. Consumers can also access their credit report from each of the three credit bureaus, Experian, Equifax, and TransUnion, once a year for free.
- Of course, Blue Water Credit is the legal and ethical industry leader in credit repair, and we can go over your report with you line-by-line, identify what needs to be fixed, and represent you in the dispute and credit repair process, leading to a fantastic new FICO score at the finish line!