You’ve probably heard the term FICO Score and while you know it has something to do with your credit, you may have wondered what exactly it means.
The FICO Score is based on a scoring model developed by Fair Isaac Corporation (FICO) that determines one’s credit risk. The higher the score, the lower the risk, and the lower the score, the higher the risk. Those with higher scores may get offered higher limits and better interest rates by lenders. The FICO score ranges from 300 to 850.
Scores are calculated using five different factors, and are approximately weighted as follows: Payment history: 35%, Amounts owed: 30%, Length of credit history: 15%, New credit: 10%, Types of credit used: 10%
35% Payment History – This includes payment information on any credit accounts (credit cards, store accounts, home loans, etc.; whether or not (and when) someone has (or has had) any bankruptcies, judgments or settlements, liens, collections or past due/delinquent items and how much (amount and number of items) is past due
30% Amounts Owed – This has to do with the amount owed on accounts; whether or not any accounts have balances; the proportion of credit lines used (how much is used vs. how much is available on credit lines) and the amounts owed on loans (the proportion of the balance to the original loan amount)
15% Length of Credit History – This includes how long different types of accounts have been opened and how much time has passed with (or without) any account activity
10% New Credit – This looks at the number of recently opened accounts; when they were opened; the proportion of recently opened accounts vs. older accounts; the number of and dates of recent credit inquiries;
10% Types of Credit Used – This has to do with the number of (and relevant info on) various types of accounts one possesses (credit cards, installment loans, mortgages, etc.)
FICO Scores include all of the information above, and your score is based on the overall mix of information in your credit report, and as the information changes, your score will change.Late payments and delinquencies will lower one’s score, but on-time payments and steadily paying off lines of credit will raise your score.
So why do we hear that there are three different credit scores? What’s that all about? There are three main credit bureaus: Equifax, Experian and TransUnion. Each have their own proprietary models for computing scores and each maintains separate credit databases on individuals, so your score is likely to vary slightly between agencies.
Comparing your Equifax credit report to other reports can be helpful in understanding your credit, identify if you have any credit report mistakes and can help you understand some of what lenders are using to make a lending decision. It’s important to remember that lenders do take other information, like your income and length of employment when making a lending decision.