Importance of the CREDIT SCORE or FICO

It is an index, a value or a rating, which measures or establishes the risk that a person represents for the granting of a loan by a financial institution. It is expressed as a three-digit number and is calculated by applying algorithms and advanced statistical formulas to the historical credit data of a certain person at a specific time.

In the United States, credit history data for every adult person can be obtained through one of three credit reporting agencies; TransUnion, Equifax and Esperian.

The credit history includes aspects such as the last credits requested, the percentage used of the total available credits, the timeliness of payments, etc.

There are several credit scores in the world, however, the most used, especially in the United States, is FICO (Fair Isaac Corporation), specifically with its FICO Score product, which is considered the standard measurement of consumer credit risk in USA.

So, 95 of the top 100 US financial institutions, the top 10 US personal lines of credit insurers, more than 30 of the top 100 US retailers, and the top 100 credit card issuers in the US that country, use this scoring system.

How does the credit score or FICO work?

FICO, and credit scores in general, are calculated based on the data in your credit report, taking into account five factors with varying degrees of impact or importance, as described below:

Payment history

This is the most relevant factor for calculating your credit scores, since it represents 35% of the total score and has to do with your behavior over time, in relation to late or punctual payments of bills, credit cards , mortgages or any type of loan.

Therefore, to maintain a positive payment history it is necessary that you make the payments of all your credits on time.

Utilization of outstanding credit or debt

This factor is also very important for the calculation of the FICO, since it represents 30% of the total score and refers to the percentage of credit that you have used or the amount of your total debt in relation to the amount of credit that you have available.

For example, in the case of a credit card, it is the balance you have compared to the limit of said card.

Therefore, in order to maintain a favorable utilization rate, you want to keep your credit balances as low as possible, and if this is not feasible for you, then you should avoid maxing out your credits.

Duration or length of credit history

This factor has a moderately significant influence for the calculation of the FICO, since it represents 15% of the total score and it is the amount of time that you have had credits in your name, for which it is recommended if you have not done so yet. , that you start applying for credits as quickly as possible and using different financing tools according to your needs and possibilities.

Types of credits used

This factor has a minor influence on the FICO calculation, since it represents 10% of the total score and contemplates the variety of credits you have had, such as mortgages, consumer financing, vehicle loans, among others.

In this case, it is advisable to diversify and request different types of credit, but only when you really need it.

Requests to obtain new credits

This factor, like the previous one, has little influence on the FICO calculation, since it represents 10% of the total score and is based on the number of open credit accounts and the number of credits requested in the last time.

However, it is not convenient to dismiss this factor, which is why, as we mentioned before, you should diversify the types of credits, but without having or requesting an exaggerated number of them and, even less, simultaneously or in small periods of time.

The evaluation of these five factors yields the FICO score, which ranges between a minimum of 300 and a maximum of 850, with a defined assessment or classification, according to score ranges such as those shown below:

  • 800-850 is considered an excellent score.
  • 740-799, is considered a very good score.
  • 670-739, is considered a good score.
  • 580-669, is considered a fair or reasonable score.
  • 300-579, is considered a bad score.

This assessment according to the score is referential and very close to reality in most cases, however, it is important to note that each lender or financial institution has its own standards to classify the risk level of a possible debtor and, in consequently, determine whether or not to approve a credit application.

Additionally, your FICO scores may be different for two reasons:

Because they depend on the data of the company that prepares the report, which may be different.

Because there are some variations in the scoring model that adapt to the type of entity that grants the credit, so that you can have, for example, a FICO score for a home loan and another to insure your car even when the data provided by the same company.

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