Let’s take a look at FICO scores and how they’re calculated.
Your FICO score is a numerical representation of the odds that a consumer will default 90 days or more or a credit card or loan.
It’s really that simple.
The lender wants to know what the odds are that you’ll stop paying for 3 months or more.
Here’s the breakdown:
|800+||1485 to 1|
|720 -799||659 to 1|
|680 – 719||112 to 1|
|620 – 679||47 to 1|
|Below 620||15 to 1|
Using the chart above, this mean that for every 47 consumers with with a 625 score that a lender lends money, on average 1 will default in 90 days.
That means for the lender to make money, they have to charge more interest to those with lower scores to offset the losses of the 1 who defaulted.
How your scores are calculated are based on 5 criteria:
- Payment history (35%) – Do you pay your accounts on time?
- Amounts owed (30%) – How much of your credit are you using out of your available credit?
- Length of credit history (15%) – How old are your accounts? Generally, older his better.
- Credit mix in use (10%) – What’s your ratio of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
- New credit (10%) – Opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.
Wait! Before you go signing up for just any old credit monitoring service, here’s what you should know.
All credit scores are not the same.
Lenders currently use FICO scores. You can get your FICO scores from myfico.com.