Understanding what FICO scores are and how it affects your credit can make the difference between securing the mortgage or loan you need and being refused. Think of credit scores like a game. There are few rules to follow if you want to be attractive to lenders. Here are our top tips for maximizing your FICO scores.
FICO started life as the Fair Isaac Co. and is now known as FICO. It is a data analytics company that provides reports to lenders to help them decide how creditworthy an individual is. FICO is not a credit reporting agency like Equifax, Experian or TransUnion, but it takes data from these agencies to make their reports.
Your FICO score is made up of several components. They are:
- Payment history
- Current level of debt
- Types of credit used
- Length of credit history
- New credit
Your credit worthiness is judged on the above parameters to ascribe you a score. The scores are between 300-850. Anything above 620 will generally mean you can access credit –whether it be a loan, mortgage or credit card- without difficulty. If your FICO score is below 620, you will find it more difficult. Lower scores will warn lenders that your credit history is not sufficiently strong to indicate likely repayment of their loans. This means that if you find credit with a low FICO score, you will often have to pay higher rates of interest in order for the lender to mitigate their risk.
There is a basic FICO score, but it also goes into detail. By using special formulas, it will assess the likelihood of non-payment of specific types of loans like car loans for example. Your FICO score may indicate that you are more likely to repay a mortgage than a credit card, for example. Getting refused for one type of loan does not necessarily mean being refused for other types.
There are Different versions of FICO Scores
FICO offer lenders access to 53 different versions of their report, meaning there is no one standard credit analysis type. Lenders, like your bank, mortgage company, auto dealer etc. can access whatever report best suits their client base and industry.
How to Maximize your FICO Scores
There are ways to ensure that you have the best FICO scores possible and increase the chance of getting the credit you need. They are:
Pay your bills on time
This sounds easy but with the stress of daily life, sometimes we miss payments. Keep on top of your repayments at all times.
Keep revolving balances low
Lenders do not like to see people putting off payments for large amounts. Revolving small amounts is fine, but always strive to pay off your monthly balances on credit cards.
Don’t apply for credit
Inquiries can negatively impact your credit rating. This is because you are considered to be less creditworthy if you constantly apply for credit.
Don’t take out unnecessary credit
If lenders see you have multiple outstanding loans like auto loans, home loans, mortgages and credit cards, this raises alarm bells. Statistically, adding another loan on top decreases your likelihood of paying it back.