Your FICO Score

What is a FICO Score?

A FICO score is a credit score developed by Fair, Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac & Co. began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation.

A credit score attempts to condense a borrower’s credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information to best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower’s credit history considering numerous factors such as:

•  Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really four FICO scores computed by data provided by each of the four bureaus— Experian, Trans Union, Equifax and Innovis. Some lenders use one of these four scores, while other lenders may use another score.

Frequently Asked Questions (FAQs)
How is the FICO Score developed?

The FICO Score is a composite of five categories of information which is collected from the major credit bureaus:

• Bill Payment History (35 percent). Missing payments or paying the minimum each month lowers the score while paying bills on time will increase the FICO score.
• Credit Utilization Ratio (30 percent). This refers to the balance ratio of the credit limit (e.g. amount owed). It is better to have smaller balances on several credit cards rather than maxing out one card.
• Length of Credit History (15 percent). A history of making payments on time with the same companies is advantageous.
• New Accounts (10 percent). Routinely applying for new credit lines results in the consumer looking riskier. Don’t flip cards or chase the lowest rate and offer.
• Types of Credit (10 percent). Owing on a mortgage, auto loan, as well as credit cards looks better than owing credit cards only.

Note that income has no bearing on a FICO Score. A person with high income could be a poor money manager while a person with lower income could manage their credit efficiently, therefore the low income individual would have the higher FICO Score.

How can I increase my score?

While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

•  Pay your bills on time. Late payments and collections can have a serious impact on your score.
• Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
• Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively.
• If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.

Your FICO score affects the interest rate you pay whether it is a home loan, cell phone, car loan or on a credit card. For example, on a $200,000 30-year, fixed rate mortgage:

These interest rates would result in monthly payments ranging from a low of $1,189 to $1,542.

Your FICO score would impact a $10,000 36-month auto loan as follows: