FICO Score
A FICO score is a credit score created by the Fair Isaac Corporation (FICO). Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit.FICO scores take into account data in five areas to determine a borrower's credit worthiness: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts.
Definition: The FICO score is a credit scoring system created by the Fair Isaac Corporation (FICO). Lenders use a borrower's FICO score along with other details in the borrower's credit report to assess credit risk and determine whether to extend credit. The FICO score considers five aspects of data to determine a borrower's creditworthiness: payment history, current debt levels, types of credit used, length of credit history, and new credit accounts.
Origin: The FICO score was first introduced by the Fair Isaac Corporation in 1989. Its purpose was to provide lenders with a standardized credit scoring system to more accurately assess a borrower's credit risk. Over time, the FICO score has become the most widely used credit scoring standard in the United States and globally.
Categories and Characteristics: The FICO score is primarily divided into the following categories:
- Payment History: Accounts for 35% of the total score. This is the most important factor, reflecting the borrower's past repayment record.
- Current Debt Levels: Accounts for 30% of the total score. This part assesses the borrower's current total debt in relation to available credit limits.
- Types of Credit Used: Accounts for 10% of the total score. This part considers the different types of credit the borrower uses, such as credit cards, mortgages, etc.
- Length of Credit History: Accounts for 15% of the total score. This part assesses the average age of the borrower's credit accounts.
- New Credit Accounts: Accounts for 10% of the total score. This part assesses the number of new credit accounts the borrower has recently opened.
Specific Cases:
- Case 1: Xiao Ming has a good payment history, low credit card utilization, diverse types of credit accounts, a long credit history, and has not opened new accounts recently. Therefore, Xiao Ming's FICO score is high, and lenders are willing to offer loans at lower interest rates.
- Case 2: Xiao Hong has multiple late payment records, high credit card utilization, single type of credit account, short credit history, and has recently opened several new accounts. Therefore, Xiao Hong's FICO score is low, and lenders may reject her loan application or offer loans at higher interest rates.
Common Questions:
- Question 1: Why did my FICO score suddenly drop?
Answer: The FICO score may drop for various reasons, such as late payments, increased credit card utilization, opening new credit accounts, etc. - Question 2: How can I improve my FICO score?
Answer: To improve your FICO score, you can make timely payments, reduce credit card utilization, avoid frequently opening new accounts, and maintain a diverse range of credit types.
