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FICO Score: How To Calculate and Why It Matters

Getting access to good credit is very important in your business and household finances. Access to good quality credit can have lasting implications for your financial wellbeing. It affords you quick access to the capital investments you need for your business or the household expenses that need to be addressed immediately. It also means that your cash flow won’t be subsumed by higher than market average interest rates.

Your credit rating is, of course, a key factor in deciding the quality of credit that you can access. Unlike our counterparts across the pond, we do not have a universal credit-rating system in the UK. However, their near-universal FICO scoring system is still relevant to UK consumers and businesses.

Let’s take a closer look.

What is FICO?

FICO is a credit scoring system created by the Fair Isaac Corporation in the US. It is used by American financial institutions to ascertain the creditworthiness of customers to ensure that lending is responsible, accurate, fair (and, of course, profitable) for lenders.

Unlike our oligopoly in the UK, FICO is highly pervasive in the US, influencing over 90 per cent of lending decisions across the pond.

Do we use FICO scores in the UK?

FICO is an American system that affects American financial institutions, businesses and consumers. But that doesn’t mean that it has no relevance to us in the UK. Although its presence is much less ubiquitous, FICO is still used for credit scoring in the UK. Its algorithms play a part in helping financial institutions decide who gets the best credit. So it’s worth getting to know how they calculate credit scores.

How are FICO scores calculated?

FICO scores are calculated using 5 factors in an applicant’s credit data. Each is weighted slightly differently. Let’s take a look at how each influences your business or personal credit score:

  • Payment history (35%) The most important factor, accounting for over a third of your credit score, is whether or not you’ve been able to repay your previous debts and make monthly repayments promptly.

  • Amount owed (30%) The overall amount owed across all of your creditors.

  • Credit history length (15%) — Broadly speaking, the longer you have held different credit accounts and kept them in good standing, the better your score.

  • Credit mix (10%) The different types of credit that you or your business has is also a minor factor.

  • New credit (10%) The amount of new credit that you have taken out is also a minor factor in determining your score. If an individual or business has taken out a lot of credit in a short space of time it potentially increases their risk factor for lenders. Especially if their credit history is limited.

Why are FICO scores important for UK businesses and consumers?

Unlike the US, the UK does not have a universal credit scoring system. Instead, there are multiple Credit Reference Agencies (CRAs) such as Experian, Equifax and TransUnion. Not all lenders report to all CRAs, which is why there will often be some variation between your credit score depending on which CRA you use. Financial institutions will make lending decisions based on data from multiple CRAs.

In 2011, FICO announced that it would develop UK-specific versions of its Credit Capacity Index and Economic Impact Index in partnership with Equifax. So, while not the dominant presence in UK credit, its algorithms will still likely play a part in ascertaining your creditworthiness.

We can help

If you’re interested in finding out more about FICO scores and credit ratings, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

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