What Is A FICO Score, And Why Is It So Important?
FICO stands for Fair Isaac Corporation, and it is a software analytics company that calculates borrowers’ credit score to determine their credit worthiness, and lenders in turn use loan applicants’ FICO scores to determine whether to extend loans to these applicants. Just as Google updates its algorithms every so often in order to provide more accurate results for users’ search queries, FICO updates its algorithm periodically, too. The most recent update was in January 2020, just before the COVID-19 pandemic began to take a major effect on the United States economy. Repairing your credit is largely synonymous with improving your FICO score. To take the first steps toward raising your FICO score, contact a Jupiter credit repair lawyer.
How FICO Calculates Your Credit Score
The current formula for calculating your FICO score is as follows:
- 35 percent of your FICO score is your payment history, including installment payments on loans and recurring monthly bills such as utilities, rent, and phone and Internet bills. Making your payments on time improves your FICO score, and late payments and missed payments lower your FICO score.
- 30 percent of your FICO score is your accounts owed, which means the total amount of outstanding debt you have, relative to the total amount of credit available to you. In other words, the raw dollar value of your outstanding debt is not what determines this aspect of your FICO score. Instead, someone whose credit card has a limit of $20,000 and who owes 10,000 will have a higher credit score than someone whose credit card has a limit of $1,000 and who owes $900.
- 15 percent of your FICO score is the length of your credit history. If you have multiple lines of credit, the FICO score takes into account how long each one has been open.
- 10 percent of your FICO score is your credit mix. The people with the highest FICO scores have a variety of types of credit, including home mortgages, car loans, and credit cards.
- 10 percent of your FICO score is new credit, in other words, loans you have borrowed in the last year. Borrowing multiple loans in a short span of time temporarily lowers your credit score, because you have not yet shown that you can keep up with the payments on all of them.
How Lenders Base Lending Decisions on Your FICO Score
90 percent of lending decisions are based at least in part on the borrower’s FICO score. Sometimes a score even one point below the threshold is a deal breaker for the lender. In other cases, lenders also consider other factors, such as the borrower’s income and how long the borrower has worked at their job.
Improve Your FICO Score With a Credit Repair Lawyer
A South Florida credit repair lawyer is your best hope for repairing your credit and improving your FICO score if you have complex debt problems or have recently declared bankruptcy. Contact Nowack & Olson, PLLC in Jupiter, Florida to discuss your case.