The ABC’s of FICO Scores

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Almost everyone knows that having a good credit score is important if one ever wants to apply for a loan, credit card, or even a rental home lease. But few people know what defines a good score, and even fewer know how their score is calculated.

The "FICO" (a copyright of Fair Isaac Corporation, a company that offers consulting services and enterprise decision management systems) score's exact formula is proprietary (meaning it's their company secret). However, they do make public that Scores are calculated from a lot of different credit data in your credit report, including:

  • 35% payment history
  • 30% amounts owed
  • 15% length of credit history
  • 10% new credit
  • 10% types of credit in use

FICO scores range from 300-850 - the higher the better. FICO adjusts its FICO score formula for each of the 3 national credit reporting agencies (Experian, Equifax, and TransUnion) to take advantage of their unique data strengths and also because not all credit information is reported to all 3 credit bureaus, and there can be errors in a person’s credit record. (It is wise to take advantage of your free credit reports to watch for these errors). FICO scores do not take into consideration your race, color, etc.; where you live; your salary; size of your home, make of car, or other personal information not related to credit risk. It is also reassuring that requests made by lenders in order to make you a “pre-approved” credit offer such as a home or auto loan are usually not taken into consideration on your score. (but be aware that multiple inquiries from many credit card companies within a short period of time can negatively affect the score). Negative information on your credit reports, such as not making payments, bankruptcy (both Chapter 7 and Chapter 13), losing a home to foreclosure, deed-in-lieu of foreclosure, or short sale of a home remains for 7 years (10 years if there is a full discharge of debt on a bankruptcy), but the impact lessens over time. Bankruptcy generally has the highest impact on the FICO score. Short sale & deed-in-lieu (especially if you have not made your payments) and foreclosure can all have a similar impact. How much the score changes will depend on how the short sale or DIL is reported, and on the other information in the credit report. If reported in a way that indicates “not paid as agreed,” the FICO score could go down 100+ points. Although the negative info remains for many years, you may still be able to work your score back up to an acceptable level and be able to qualify for loans or other credit in a much shorter length of time, depending on how well you work at it, and the type of circumstance in which the credit was impacted. Credit CardsIf you need or desire to increase your credit score, you should apply for new credit cards only as needed, pay your bills on time, if you are not current - GET current, keep balances low on credit cards, don't open a lot of accounts quickly, don't close unused credit cards at once thinking it will improve credit - this may backfire, and see a credit counselor if you are having trouble getting back on track. *The above general information is not meant to be taken as professional tax, credit, or financial advice. For more information please refer to the source at http://www.myfico.com/CreditEducation/ or seek advice from a tax, law, or credit professional.


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