Credit scores, also referred to as FICO (Fair Isaac Corporation) scores, are numbers that define a person’s capability to settle debts, and are used by businesses and financial institutions to check credit histories. It represents the probability that a person will pay for his financial obligations. Several score models are available; however the FICO score is the most widely used.
FICO is the acronym for Fair Isaac Corporation. It is the company that provides data management programs and services that are used by financial institutions such as banks, credit card companies, insurance firms, and other related organizations. Decision making services are also provided here, and that includes giving out the said scores. Aside from that, it also provides certain products related to credit. It’s the pioneer credit score-giving company and it’s based in San Jose, California.
What Comprises A Credit Score?
Simply put, a credit score is a number between 350 and 850 that summarizes your credit history in figures. The higher the score, the better your credit standing will be. An ideal score would be to get a 700 or more, because if not, you will be considered as a high-risk borrower.
Percentages that Make Up Your Credit Scores:
- 35% – This number represents the capability of the borrower to pay his or her debts. It will show how good a debtor the person is, and if the previous obligations are settled promptly. FICO focuses more on loans to gather this portion such as checking installment loans, mortgages, student loans, and most especially credit cards. If all loans are settled without any problems (e.g. skipping payments, delayed settling of bills), then this part of the credit score will be easy to fill.
- 30% – This is calculated based on your total current debts. Revolving lines of credit are most weighted in this area, and credit card holders are highly observed in regard to this. If you max out your credit cards most of the time, then this part of your credit score is affected. Staying within your credit limit gives you a high score on credit utilization which greatly influences your credit score.
- 15% – This percentage is referring to the length of time a certain borrower has his debt open. It also refers to the most current action a borrower has taken against his debt. It is also said that the longer your credit history, the better your score will be – it is because it gives out more information that creditors can use to gauge whether a person will be a good borrower or not.
- 10% – Inquiries also affect FICO score, and this is the percentage that gets affected. It highly advises a borrower not to apply for too many credit cards at once. Not only it will suggest that he is in need of credit due to a financial difficulty, also getting a denied application can also have an impact to the FICO score.
- 10% – Another 10% refers to mix of credit. You can get a good or even a perfect score on this category if you have several types of loans and are paying them promptly. It shows you can handle several types of credit and are dependable as a borrower.
Significance of Credit Scores
How important are credit scores to a borrower, and to a creditor?
A credit/FICO score is a three digit number that can be very important. If a person wants to have a credit card, his credit history will be checked. If that person will apply for a loan, his score will also be checked. Even buying a house or a car involves seeing your credit scores.
To a borrower, a good credit score can help them a lot as it will give them good interest rates. It also gives them good prices for insurances. For creditors, checking the said score is important because it tells them whether the borrower can be responsible enough to pay for the debts and loans they are going to provide that person. The only way for lenders to check how capable you are is to check your credit rating, so it’s definitely good to have it stay on a high and respectable number.