Credit, FICO & How It’s Used



There exists this 3 digit numeric number that determines whether you have a house or live as a tenant, whether you have a mercedes or a broken down toyota, whether you have a credit card that gives you insane perks or one that confines you to $200 and has an APR of 24%

That number as most of you have guessed by now is called your FICO score. There are many types of credit scores but they are not actually used for lending, much to our dismay. This means that your FREE credit scores from your credit card company is usually wrong. Those scores are vantage scores that are generated by a different algorithim than the one FICO uses and evidently the one your lender also uses. Andddd guess what? It gets even better… FICO has 8 different versions of their score for each bureau.. This usually means that the consumer score you paid from FICO is also incorrect… The correct score is actually contingent upon the type of lending you are trying to get. This means the dealership at Mercedes Benz will use a different FICO score for Experian, Transunion & Equifax than your mortgage lender will. We will revisit which scoring model corresponds to which type of lending in a bit.

For now, let’s go over how your FICO score is calculated.

                                       

As you can see from the infographic, your FICO score is created using an algorithm that cares most about your payment history for each and every single account for the past 7 years. Each account is reported every 30 days and accounts for 35% of your credit score.

The next 30% is made up of the Amount you owe. This means they measure to see what your balance is for each and single account that you have. It’s widely accepted to not have a credit utilization of more than 30%. Even though your credit card allows you to have limits of $1000, $5000, etc, you should never use more than 30% of it. It will hurt your score if the usage goes beyond that.

The next 15% is the average age of your credit accounts. The longer your accounts, the better off you are in terms of satisfying that 15%. The average of your accounts being 10 years of age will have a better score than someone whose average age is 3 with identical conditions.

The last two criteria that each make up 10% of your FICO score are the Types of credit used and New credit you’ve acquired. The types of credit refer to the different kinds of lenders you have on your report. A person who has an open mortgage, several credit cards and an auto loan will look to be more reliable in the eyes of a potential lender than someone who has only credit cards.

Here is a visual recap of everything we covered

The totality of these factors generate your score for each of the 3 bureau’s from a scale of 300-850. Now comes the tricky part. There are 8 FICO scores for each bureau and so the exact score used depends on the kind of loan you are trying to get approved for. For example, if you are trying to get approved for a car loan, FICO Auto Score 8 is the scoring model used. However, for mortgage lending , FICO score 2 is used.

When an individual purchases the full FICO package for all 3 bureau’s, they are given access to the different scoring model’s that are employed by lenders.

                                                 

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