What is a FICO Credit Score?
FICO is an acronym for Fair Isaac Credit Organization.
It is a complex method of determining the probability that those applying for credit will pay
Fair, Isaac began its trailblazing work with credit scoring in the late 1950s.
Since then, scoring has become commonly accepted by lenders as a reliable means of evaluating
a person’s creditworthiness.
The FICO credit score, which is the most widely used method, attempts to condense a borrowers
credit history into a single number.
90% of the largest U.S. banks
use FICO® scores
FICO scores range from a low of 300 to a high of 850. A FICO 850 is the numerical
representation of a perfect credit score. According to Fair, Isaac, approximately 11% of the population has a
FICO score of 800+, with just 1% or so achieving the magic 850 number.
Credit Score Computations Are Top Secret
If you are planning on reading a book or taking a course to learn the closely guarded methods Fair Isaac’s uses to
compute credit scores, forget about it. Neither Fair, Isaac & Co. or the credit bureaus reveal the formulas of
how they actually determine credit scores. Want something else to make you go, hmmm? Here it is, the Federal Trade
Commission has ruled their secrecy is in no violation of any laws. Having shared that, here’s the information Fair,
Issac & Co does provide us with, in terms of how they compute credit scores. They weigh five different
as outlined below
in the pie graph. We’ll provide a very brief description of each category.
As you can see, your payment history is the most important factor for your FICO score. Lenders
want to know how you've paid your bills in the past, placing the most emphasis on recent activity. Paying your
bills late on a consistent basis is bad. On time payments are good. Having accounts sent to collections is worse
and declaring bankruptcy is a MAJOR red flag.
Then after that, the amount of money you owe which includes two areas. Number one, all of the:
credit cards, car loans, mortgages, personal unsecured loans, home equity lines, etc) and number two, the amount
of available credit you have access to.
If you have 13 credit cards and each has a $10,000 credit limit that means you have $130,000
of available credit. Statistically speaking, people with a lot of credit available tend to use it. Consequently,
that makes them a less attractive credit risk, which will lower their FICO score. People with the highest FICO
scores use credit sparingly and keep their balances low.
Length of Credit
Your length of credit history, plays another vital part of your FICO credit score. Lenders
look for borrowers with long credit histories. You should be cautious about opening many accounts in a short
span of time.
Approximately ten percent of your credit score is based on how many new accounts you’ve
recently established. This category reviews: recent requests for credit report, length of time since credit
report inquiries were made by potential lenders, the number of accounts and the length of accounts.
This category looks at the overall mix of credit such as: credit cards, car loans, mortgages,
unsecured loans, personal unsecured loans and home equity lines.
How Do Most People Score on FICO?
The average FICO score is usually considered to be around 720. If your FICO score is less than
600, all most all lenders will pretty much tag you as a bad credit risk. Meaning, they may extend credit to you,
but the costs are going to be high.
Take a look at the difference in payments on a 30-year mortgage when the FICO scores goes from
500 to 850. The rule of thumb is simple:
The higher your FICO credit score,
the lower your payments
The lower your FICO credit score
the higher your payments
How to purchase a home without a bank
Source: Harold Becker, REODr.com