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What is a FICO Score?
By Molly's Brother | January 16, 2008
We have all heard the term “FICO score.” In fact, we have all used the term. Few, however, know what a FICO score really is. Seriously. Very few. Here’s what he do know: the FICO score was developed by Fair Isaac & Co (F.I.C.O–get it?) back in the late 1950s. It is a scoring method of determining the likelihood that credit users will, in fact, pay their bills. The FICO score attempts to predict a consumer’s credit worthiness by condensing several aspects of a borrower’s history. Fair Issac & Co. takes into account the following factors when calculating a FICO score:
- 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
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
How are the scores calculated?
If you are concerned with your FICO score, you may be interested to know exactly how the score is calculated. Although not exact percentages, the following provides an excellent blueprint to see what matters.
- Your payment history–about 35% of a FICO score.
- How much you owe–30% of a FICO score
- Length of your credit history–15% of a FICO score
- New Credit–15% of a FICO score
- Other factors–10% of a FICO score
It should be noted that, while the FICO score, has become the industry standard, each of the three credit reporting bureaus has their own credit scoring system, too.
The FICO score range extends from 300 to 800. Most people fall within the 600-700 range. Scores above 720 are excellent.
How can I increase my score?
It is impossible to increase your score over a short period of time. Here are some tips to increase your score in the future.
- Pay your bills on time, pay your bills on time, pay your bills on time! Late payments will have a serious impact on your score.
- Do not apply for credit frequently. Having multiple 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. As a rule of thumb, Suze Orman said that you should try to use no more than 30% of your credit limit.
- If you have limited credit, obtain additional credit. Not having a sufficient credit history can negatively impact your score. (source: http://www.mtg-net.com/)
A FICO score can impact your financial future. In the wake of the current housing crisis, banks are now only going to loan to individuals who have strong FICO scores. Additionally, if you do have a less-than-stellar score, you will pay for it in the long run. With higher interest rates, you could pay up to $100,000 more for a home loan over the course of a 30-year mortgage.
Topics: Debt |