All you need to know about FICO score 8

All you need to know about FICO score 8

FICO credit score comprises of 3-digit numbers that range from 300 to 850. The scores are usually generated from consumer credit reports and they help lenders determine the creditworthiness of a borrower when they apply for a loan or credit. This is the reason why it is very important to get a copy of your credit report from each of the 3 major credit bureaus and ensure that the information is accurate and updated before applying for a loan. Credit reports contain information on whether the consumer makes payments on time and the number of credit accounts that are still open. Such information can have a great impact on your FICO score. For instance, paying bills on time will have a positive impact on your score. On the other hand, failure to pay your credit card bills in a timely manner can end up reducing your score. There is also another FICO score version known as the FICO score 8 that is mainly used by credit card issuers.

Consumers have more than one FICO score

Consumers are allowed to get a copy of their credit report together with the information that was used to come up with the score. But these are usually educational scores meant to inform the consumer where they stand as far as their financial history is concerned. Still, you may not know the actual score that the lender may use to determine whether you qualify for a loan or credit. Besides the FICO score, lenders can also use the VantageScore scoring model. These scores can greatly vary from what you receive as an educational score and even if the FICO score is used, you still may have more than one score. For instance, FICO score 9 was released recently, but many lenders still prefer to use FICO score 8. There are also other FICO models that are tailored to meet specific lending situations. For instance, auto lenders may use the FICO auto scores while FICO scores 2, 4 and 5 are used for mortgage lending. Credit scores used by credit card companies are quite diverse. Besides using the FICO score 8, FICO Bankcard 2, 4 or 5 and FICO score 3 can also be used. However, most credit card issuers use FICO score 8.

What FICO score 8 is all about

Every time a consumer applies for a loan or credit, the bank has to check their credit reports to determine whether to grant the loan or not. There are also higher chances that the FICO score will be considered since it is the model used by most lenders in the United States. Even so, a consumer can still have more than one FICO score. FICO score 8 is specifically designed for credit card issuers. It has almost the same features as other versions of the fico score. The main difference is that FICO score 8 does not consider all types of credit to be equal. With FICO score 8, the consumer’s behavior with credit cards is also considered when coming up with your score. Again FICO score ranges from 200 to 900. This is contrary to the traditional FICO score that was between 300 and 850. There are also other differences between FICO 8 score and the traditional FICO score. For instance, one time missed payment does not have a great impact on the FICO 8 compared to other versions. Late payment means making payment 30 days after the due date. However, multiple late payments can greatly affect your FICO score 8. Again, high credit card utilization matters more when calculating FICO score 8. It is therefore recommended to keep your credit card utilization rate at 30% or less.

What is used to calculate your FICO score?

Knowing the factors used to come up with your credit score is the first step for you to make the right financial decisions in the future. Here are the factors used by credit reporting agencies to come up with individual FICO scores.

35% payment history

Payment history is one of the main factors that determine a consumer’s FICO score 8. Lenders believe that a consumer’s past financial behavior will determine how they behave with finances in the future. When coming up with your score, FICO considers how frequently cases of missed or delayed payments have been reported. One of the ways to ensure that your score improves is by making timely and consistent payments.

30% amount owed

This category is the percentage of available credit being borrowed or used. Consumers who exceed their borrowing limit are considered as risky borrowers. To improve your credit score, it is important to keep your credit card balances low.

15% length of credit history

The length of time that you have been using credit is also used to come up with your credit score. This includes the number of years you have any obligations, the age of your oldest account and the average age of all the accounts. If you have a long credit history with no records of late payments and other negative information, your credit score will improve. A short credit history is also ok, provided you are able to pay bills on time. Even if you do not use your credit card accounts, it is important to leave them open. This is because the accounts will age and eventually improve your credit score.

10% credit diversity

Borrowers with a diverse credit mix are usually preferred by credit agencies. Credit diversity demonstrates the consumer’s ability to effectively manage different types of credit accounts. To get a higher score in this category, you need to have a variety of open accounts; both revolving credit and installment loans like mortgage, auto loans, student loan, etc.

10% number of credit inquiries

Once you apply for a new credit, a hard inquiry is placed on your credit report. This can have a negative impact on your credit score. On the other hand, soft inquiries like self-checks and employers checks do not have an impact on your credit score.

How can you improve your FICO score 8

As earlier stated, there are quite a number of credit scoring models used by lenders, but FICO credit scoring models are the most widely used. This has led to periodic updates of the FICO score model to help lenders make better decisions and also for the consumer to access the type of loan they need. Compared to the past, most individuals, including business owners rely on loans and credit to meet their financial needs. FICO scores have also been updated to adapt to this change of behavior. Once a new FICO score version is developed, it is released to the market. There are lenders who can make the upgrade faster compared to other lenders. This is the reason why lenders use different FICO score versions. But regardless of the version used by your lender, the key to improving your FICO score still remains:

  • You need to make payments on time
  • Only open new credit accounts when needed
  • Keep credit card balances low         

Does the FICO score 8 credit scoring model matter?

The answer to this question depends on what you, as a consumer wants to do. If for instance, you want to apply for a new credit line, your FICO 8 score can play a big role in determining whether you qualify and the rate of interest that you will be charged. Since it is also the most widely used scoring model, there are high chances that the lender will use it to determine your creditworthiness. But in some case, you may find a lender who uses a different credit scoring model. In this case, the model being used is what matters.

Bottom line

If you want to apply for a new loan and credit, it is imperative to know the type of credit scoring model that your potential lender uses. It is even better if you directly ask the lender the type of score and version that they are using. The reason behind this is that there are scoring consider different factors like medical collection, and there are also others that focus more on whether you make payments on time. The more you know the factors used in coming up with your credit score the better you can find ways to improve the score and qualify for more affordable loans in the future.

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