What Is A FICO Score?
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If you’ve ever been in debt you’ve probably heard the term “FICO score” but you probably don’t know what it is. So, what is a FICO score?
In the 1950s, Fair Issac & Co. (FICO) created a scoring method that would help creditors determine the likelihood that a certain user would pay their bills, based on a number of factors, mostly a borrower’s credit history.
Calculating these scores is pretty complex, from what I can tell. The people who continually develop these models study the histories of thousands — if not millions — of people who have used credit. They find factors that can help predict the future of a borrower based on several factors.
A great rule of thumb for predicting your FICO score is to use paying the monthly minimum as a medium. Late payments, collections, or settlements would have a negative impact on your score, while paying on time, full repayments, and credit increases would have a positive impact on your score.
While it’s nice to have a good rule of thumb, your FICO score is determined by many other factors. The current formula is, in fact, protected as a trade secret (which the FTC ruled was acceptable), but there are many things that are known to be used in the score, including:
- The number of late payments
- The pattern of late payments (ie: paying off your debt only when you get a final notice)
- The amount of time credit has been established
- The amount of credit that has been established
- The amount of credit used versus the amount available
- Length of time at your current residence
- Length of time at your previous residence
- Number of credit queries
- Negative information (bankruptcies, collections, etc.)
While your FICO score is important, you must remember that it is only a number based on a mathematical model. Most lending institutions use your FICO score as only one factor in determining if they will offer you credit.
Also, keep in mind that as with many businesses, lending institutions target many different markets. Some lenders will approve only the elite of credit scores, while others will target people who have had serious credit problems.
If you cannot get approved at one lender you may wish to try another lender who targets people with a lower credit score. You may end up with a higher interest rate.
Hey, not all of us can have an American Express Centurion card ;)
[tags]credit, history, fico, score, debt[/tags]
4 Comments
blaster
May 13th, 2007
at 11:25am
The finance department has been able to reverse engineer the weighting of the “score”. I suspect the other two are similar.
Approximately, 35% of the score reflects the previous credit performance. Your payment history. Only time can heal this.
30% is your current level of indebtedness. Having a balance on a credit card in excess of 50% of the limit will decrease your score. American Express uses your highest purchase as the credit limit. Paying down the plastic is what most people can do to raise their score the soonest.
15% is the length of time your accounts have been open. Longer is better.
15% is the type of credit available to you. Most likely, an algorhythm of mortgage, plastic, and auto loans.
And, 5% will be given for the pursuit of new credit. Inquiries for the same type of credit may count as one. Shopping around for a loan “should not” count against you.
Lenders will take the three scores and use the middle score. Not the average. And with some differences over one hundred points from the low to the high score, it’s imperative to check and make sure all three agencies are correct. A PITA to be sure. I also suspect that bad news travels faster than good news so it may take some time to see any improvement.
So, if you pay your bills on time, keep your credit card debt under control, have some years of good credit and good debt, and don’t go looking for loans very often, an excellent rating is yours.
P. Stocks
May 13th, 2007
at 7:50pm
The score is a deliquency predictor. Recent activity (2 years or less) weigh more on your score than older items. Only mortgage lenders use all three scores. Others will use only one. Get you free report at http://www.annualcreditreport.com and check accuracy.
A. Richter
May 14th, 2007
at 6:29am
I know when we decided to buy a house we looked seriously at our credit history and decided that we needed to clean some things up. It took us about 3 years of watching it carefully.
One thing we did was on our credit cards, and that was to pay them twice a month. The first payment was the minimum payment before the due date, then the second one matched that, or sometimes doubling it. Not only does it help pay your principle down faster, it gives you a little boost on your score, depending on how often the company reports to the bureaus.
Our other big problem was that we were not in debt enough to be considered a good risk for paying off a mortgage. I guess paying our bills and staying out of debt shows we can’t, go figure, so we got two credit cards with good rates and charged a few things we would normally have paid for with cash. We paid them off, got the limits raised and bingo, we had a score that gave us a very nice rate on our mortgage.
It seems to me as if credit cards are the key to upping your score.
Greg Fisher
June 19th, 2007
at 9:00pm
It is a persistent, nasty rumor that “Length of time at current residence” is a FICO score factor. I hate to think that someone might not move for fear of lowering their credit score.
Use a search engine and the term *FICO Length of time residence* to see the misinformation.
Will you help stamp out the misinformation?