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Is Your FICO Score an Indicator of Your Creditworthiness?

When borrowing funds to finance your home improvement in the Garden State, knowing your creditworthiness matters. You should make sure all of your credit reports are error-free to have the highest credit score possible when you talk to a lender.

By instinct, you probably want to know your FICO score to understand where your credit stands and see whether you can afford to build a deck or buy a new set of shutters in Fair Haven, NJ. This three-digit number represents your credit risk calculated using the most trusted credit scoring model in America.

Despite its popularity, though, the FICO system does not guarantee the accuracy of your creditworthiness. Below are the reasons why.

It Can Be Different From the One Creditors Know

The FICO score you can learn might not be the same score your prospective lender is interested in scrutinizing. FICO has launched numerous mathematical formulas to determine credit scores over the years, and creditors do not use the same model.

To be clear, FICO credit scoring systems put a premium on similar factors, such as payment history, credit usage, and average account age, but they weigh categories differently to suit particular purposes.

Moreover, credit bureaus might not generate the same reports and use the same FICO scoring versions, too. As a result, your FICO score from Experian can be dissimilar to that from Equifax.

It Does Not Have a “Memory” Component

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All FICO scoring systems to date do not use trended credit data. It refers to your historical credit utilization rate that goes back up to 24 months from the time of the credit inquiry. The first algorithm to ever use trended data is VantageScore 4.0, which was developed by FICO’s main rival.

So, how does the non-inclusion of your historical credit utilization rate bring down your FICO scores? It can work against you if you usually do not overuse your credit and borrowed more than usual just recently.

For instance, having less 30% credit usage for the majority of the past two years does nothing to offset the effect of 90% credit utilization in the past few months. To avoid being tagged a risky borrower because of this, you have to pay down your debts first to get approved for a home improvement loan and qualify for a favorable rate.

It Can Be Irrelevant

FICO rules the credit scoring business. The consumer credit scores it calculates are being used in more than 90% of lending decisions in the United States. Although impressive, 90% is not 100%.

If your prospective lender uses a non-FICO credit scoring model, you might not know how creditworthy you are in the eyes of that creditor. Part of improving your credit is identifying the areas to work on, which is hard to do when you are unaware of the very formula your lender uses.

Regardless of their imperfections, FICO scores are still the most reliable creditworthiness indicators you can find yourself. They might not matter much to your prospective lender, but you can use them as a guide to building your credit more quickly.

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