FICO Explained

What Is A Credit Score...
Most people don't know their credit score or how to find out what it is. A July 2003 survey commissioned by the Consumer Federation of America found that only 2 percent of Americans said they knew their credit score.
 
Your Personal Credit Score...
The one most widely used credit score is the "FICO" (Fair Isaac Corporation) score, the standard measure for credit risk. This score was developed in 1989 as a joint project by Equifax and the Minneapolis-based Fair Isaac Corporation, which provides financial services to the world's 10 largest banks, as well as companies in more than 60 countries.

The scoring system awards points for each factor that can help predict the likelihood of a person repaying debts on time. The total number of points -- the credit score -- predicts how creditworthy a person is. The FICO score, a three-digit number between 300 and 850, is a snapshot of a person's financial standing at a particular point in time. The higher a credit score, the more likely a person is to be approved for loans and receive favorable interest rates.

The best credit rates are given to people with scores above 770, but a score of 700 -- out of a possible 850 -- is considered good, according to Fair Isaac. The median score is about 725. Generic interest rate calculations show that when the score dips below the mid-600s, those consumers generally qualify only for "subprime" lending and the interest rate starts to climb significantly.
 
Fair Isaac Corporation does not maintain a database of FICO scores, as many assume. Instead, when a lender requests a credit rating, the score is generated by one of the national credit bureaus from which the lender has requested the report. Fair Isaac provides the credit bureaus with software containing an algorithm -- a mathematical formula derived from random samples of consumers' credit information -- and that is what is used to calculate the score.

FICO Scores are calculated from different credit data in your credit report. According to Fair Isaac, this data can be grouped into five categories as outlined below. Top...

15% of your score is based on your credit history...
Typically a longer credit history will increase your score. The score considers both the age of your oldest account and an average age of all your accounts.

10% of your score is based on new credit or if you are taking on new debt...
Opening a couple of new credit lines in a short period will hurt this score. If you are planning on buying real estate in the near future, put off buying a car until after it closes. A new car loan can have a big impact on what price of house you can qualify for.

10% of your score is based on types of credit in use...
The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

30% of your score is based on amounts owed on all accounts...
Even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report. The score considers the amount you owe on specific types of accounts, such as credit cards and installment loans. Small balances without missing a payment shows that you have managed credit responsibly, and may be slightly better than no balance at all. Closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score. A large number of accounts can indicate higher risk of over-extension.

35% of your score is based on payment history...
The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors though late payments are not an automatic "score-killer." An overall good credit picture can outweigh one or two instances of, say, late credit card payments.

These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.Top...

Payment History...

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
• Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due)
• Amount past due on delinquent accounts or collection items
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
• Number of past due items on file
• Number of accounts paid as agreed

Amounts Owed...

• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans) Top...

Length of Credit History...

• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity

New Credit...

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Reestablishment of positive credit history following past payment problems

Types of Credit Used...

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Note:
A score takes into consideration all these categories of information, not just one or two and that no one piece of information or factor alone will determine your individual score. See these credit score tips...

Remember...
Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high. Top...