Understanding FICO

If you've ever applied for a mortgage loan to purchase property or refinance, you're sure to have heard about your FICO score.

What is a FICO score?

A FICO score, or credit score, is like a grade given to you based on your purchasing on credit and how you pay back the amounts of credit you are loaned. The mathematical formulation of the FICO score was developed by Fair Isaac and Company. Note, the name FICO is for the name of the company Fair Isaac and Company. Lending institutions use your FICO score to determine whether they will give you a loan or not. If given a loan, most lenders offer different interest rates contingent upon how high or low your score is.

The Agencies:

There are three major national credit reporting Agencies in the United States. Experian (formerly TRW), Equifax and Trans Union, plus hundreds of smaller credit bureaus that are affiliated with one or more of the Big Three. Credit Bureaus are private (for profit) institutions that make their money by gathering your personal data and assigning

Credit Report:

If you have ever applied for mortgage, refinancing, housing rentals, auto financing, employment, insurance, or almost any type of credit, you have a credit report in your name (also called a credit file or credit history) at one or more of these credit bureaus. Creditors, banks, credit card companies, and finance companies supply credit bureaus with information they receive from applications and existing accounts.

Basically there are two types of credit reports: those provided to businesses and those provided to consumers. The credit reports have essentially the same type of information, though it is presented in different formats for each use.

Your Credit Score:

All FICO scores range from 300-850. The higher your score is, the more likely you are to get a loan. The lower your score is, the less likely you are to get a loan.

Your FICO score:

How is my FICO Score Calculated?  

There are five different categories credit bureaus look at when assigning your credit score. Here are those categories – and how much weight they have in determining your score.

35% of the score is based on your payment history. The reason more emphasis is placed on your payments being made on time is because lenders think if you are late with other payments you may be late with theirs. So the more late payments you have on record the worst your score will end up being.

30% of your score is based on your Debt Ratio, the amount of debt you currently have, compared to the amount of debt you're allowed to have. If you have a couple car loans, a mortgage, and several maxed out credit cards, a lender may be concerned that you are on the threshold of bankruptcy. On the other hand if your balances are less than 50% of the available credit, lenders will see you as responsible and may be more willing to extend your credit.

15% of your credit score is based on the Age of Credit Line. If the score is based on the length of time you've had credit, the longer a line of credit has been opened, the better it is for you.

10% of your credit score is based on New Accounts.  Opening new credit accounts will hurt your overall score.  Inquiries are also included in this category.

10% is based on miscellaneous influences such as types of credit lines.