The Importance of FICO Scores and How They are Calculated

By  //  May 9, 2020

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Many lenders look at the loan applicant’s FICO score to evaluate credit risk and decide whether to extend a loan. The individual’s FICO score affects the loan amount he/she can borrow, the loan terms (how many months he/she have to repay the loan), and the interest rate of the loan.

This credit scoring is developed by the Fair Isaac Corporation, a data analytics company that provides credit scoring services.

Basically, FICO scores are based on the information of an individual’s credit reports.

It weighs his/her history of credit payments, current indebtedness, duration of credit history, credit types used, and new credit accounts.

Each of these five factors also has its corresponding percentage that reflects how important it is in calculating a person’s FICO score. Payment history (35%), present indebtedness (30%), duration of credit history (15%), credit mix (10%), and new credit (10%).

The scores generated based on these categories ranged between 300 and 850. If you get a score beyond 650, it indicates that you have an excellent credit score.

If you scored below 620, you might find it challenging to get your loan application approved. Aside from your FICO score, lenders also check your income, employment, and the credit type you’re requesting.

For you to learn more about FICO scores, you can check the below infographic from Siloans (Source: Siloans.com).

fico score infographic

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