Fair Issac Corporations calculate FICO score. Different lenders used the FICO score of the borrower to decide on the extension and approval of the loans. The FICO score is a reliable measure of the credit-related history of the individual.
FICO score helps in the assessment of creditworthiness and credit risk. Several factors provide input in the calculation of the FICO score. These include payment history (35%) of the individual, Accounts owed (30%), the credit history (15%), credit mix (10%), and new credit (10%).So, Let’s discuss these terms in detail.
Payment history (35%)
This factor checks the past performance of the subject under consideration. It helps to assess if they are good in finance management, habitual late payers, or how they behave when it comes to making due payments. This factor helps in reflecting if payment the lender’s funds will be received back on a timely basis.
Paying behavior is the most significant contributor to the FICO score calculations. Payment history counts for not only loan-related payments but payments for the utility and other expenses. It means you’ve to pay your electricity, telephone, and other bills on a timely basis to ensure the payment history factor remains in good shape.
Individual accounts balance owed (30%)
This factor is the second largest contributor to the FICO score. It considers the ratio of a borrowed amount to available limits. If you are close to the loan limit, it signals that you have been close to the limitations of a loan and signals that you are not a good finance manager. Hence, a credit score decreases.
Credit history length (15%)
Credit history length refers to the time an individual has been using a credit facility. If an individual has been using a credit facility for an extended time, it gives a good rating for the credit history and vice versa. However, its impact is not much higher; you can have a good credit score even you never obtained any credit facility in the past.
Mix credit for FICO score
Mix credit refers to diversification in the portfolio of loans. Further, greater diversification provides an increased credit score. Diversification of the loan relates to different loan natures, including installment, home loan, vehicle loan, signature loan, etc.
New credit refers to recent credit facilities obtained by the individual. It signals there might be a problem for the individual managing the loan in the coming time. Suppose the number of recent loans is more significant. Hence, it increases credit risk and lowers the score.
Credit bureau for the FICO score
There is three credit bureau that issues FICO scores. These include Equifax, Experian, and TransUnion. Although your FICO score may be different when compared with one another, That’s because some input details were collected by one bureau, and other bureaus might not have collected as of now.
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