Today we’re going to discuss FICO score , what it is, the components and how to improve.
First off, if you apply for any type of loan, auto, mortgage or credit card, the lender is going to look at your FICO score. FICO doesn’t produce the score itself but provides the software for the credit bureaus (Experian, Equifax and Transunion).
There are five main factors that compose it:
payment history (35%)
amounts owed (30%)
Length of Credit History (15%)
New credit accounts ( 10%)
types of credit used (10%)
Payment history includes any delinquencies, Bankruptcies, judgements or liens.
Amounts owed: Accounts you owe $ on and type of debt., amount.
In general, having a variety of accounts (auto, credit card, mortgage) helps your FICO score.
Scores range from 300-850 with > 670(or 660) considered good. Anything below this is considered subprime.
There are various versions of FICO score calculated but There are two main types of FICO score used: FICO 8 and FICO 9. FICO 9 is the newest while FICO 8 is more widely used. FICO 9 includes adjustments to medical collection accounts- it counts these less harshly, so a hospital bill in collections will have less impact. FICO 9 factors in rental history, so people with no credit history can boost their score with on time rental payments. One thing to point out is that the landlord needs to report your payments to the credit bureaus. FICO 9 also ignores collections with zero balance. So, if you had a credit card go to collections but paid it off later it will not count against you.
How does one improve their FICO score?
- Check credit reports for accuracy
- Pay on time- most important
- Lower credit utilization ratio- this is the amount of credit used compared to the credit available.
- Fix credit accounts sent to collections- request a debt verification letter before paying off debt. Otherwise, your debt might be sold to another lender.
- Increase Age of credit accounts, longer the better
- Limit inquiries to check it by lenders- not a huge factor but can affect it.
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