5 credit score facts you need to know

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If you’re looking for examples of capitalism sowing the seeds of competition, look no further than your credit score. FICO credit scores, issued by Fair Isaac Corporation, are just one of several credit score marks that claim to be the best predictor of credit risk, although FICO is the most popular.

If you’re looking for examples of capitalism sowing the seeds of competition, look no further than your credit score. FICO credit scores, issued by Fair Isaac Corporation, are just one of several credit score marks that claim to be the best predictor of credit risk, although FICO is the most popular.

No doubt the presence of competition has confused borrowers, so let’s take a moment to demystify a few essentials of the FICO credit score.

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1. 90% of lenders use FICO scores

FICO scores have been around since 1989. Its pioneering advantage may explain why 90% of lenders rely on FICO for credit decisions, including determining whether you qualify for a low mortgage rate or a credit card.

2. FICO is the standard, but a few others are still important

Credit scores come in many forms and vary by provider, and you might be surprised at how many credit scores you have, each with their own criteria and associated costs for you. It is worth understanding the major players and connected relationships at play when it comes to credit scores.

FICO analyzes your credit data from all three major credit bureaus — Experian, Equifaxand Trans Union – which means you have three FICO credit scores in total.

Additionally, in an attempt to unseat FICO’s decades-long dominance, the three credit bureaus have teamed up to create VantageScore. Like FICO, it pulls data from credit bureau reports and you get a VantageScore for each of the credit bureaus.

While each scoring model has its nuances, it is important to understand that they are all directionally accurate, even though the ranges and scores vary.

3. Bad credit could cost you hundreds of thousands of dollars

Credit scores make a huge difference to how much you pay for a mortgage. For example, suppose you are looking for a 30-year fixed mortgage for $200,000. When you look at current rates, you’ll find that people with low credit scores between 600 and 619 can end up paying $101,735 more over the life of a modest 30-year mortgage, compared to those with low credit scores. credit is excellent between 760 and 850. This is tuition for one child (or two), or in other words, $3,391 per year in additional fees. The culprit is a high mortgage rate, which can vary by more than 2 percentage points for great credit versus bad credit.

4. FICO scores range from 300 to 850

FICO scores have a standard range of 300 to 850, with the average American score sitting at 689, according to MyFICO. FICO scores fall into five categories:

  • Poor: 579 and below.
  • Correct: 580 to 669.
  • Good: 670 to 739.
  • Very good: 740 to 799.
  • Great: 800+.

This range differs from that of the VantageScore models, which is why a FICO score of 700 can mean something different than a VantageScore of 700. Again, the important thing to know is that the two are in the same direction, although the numbers vary.

5. Five Underlying Credit Factors Matter

The specific formulas behind FICO scoring models are shrouded in mystery, but five pillars are well understood and weighted by their importance. Payment history (35%), credit usage (30%), average credit age (15%), new applications (10%) and account composition (10%) all feed into the FICO scoring formula. When looking to boost your credit score above 800, it’s crucial to know the driving factors, and the easiest way to great credit is to simply pay every bill on time and keep it low. of indebtedness. These two factors combined influence 65% of your credit score.

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