Fico Score Basics

When it comes to credit, your FICO score is paramount. While there are other credit scoring systems, the FICO score is the most dominant.

FICO is probably a very mysterious and confusing word. You probably know it has something to do with credit; but you may not know exactly FICO means and what your FICO score is.

Your FICO score rates your credit worthiness. Your score determines the interest rates you will get on loans or if you will even qualify for a loan at all. It is a predictive measure used by lenders to rate the probability that you will default on a loan or line of credit. The higher your FICO score, the lower your risk of default is determined to be. That means that a high score leads to a greater the likelihood that you will qualify for the best rates available on any financial product you shop for, such as mortgage loan, car loan, or credit card.

FICO: Fair Isaac Company

FICO is short for Fair Isaac Company.

Founded in 1956, the Fair Isaac Corporation is the financial institution that developed the FICO credit score. The FICO score, which rates your credit on a scale from 300 to 850, is used with slight variations by the three major credit bureaus: TransUnion, Experian, and Equifax. This credit rating is used to measure your credit risk. You can obtain your FICO through most major consumer reporting agencies in the U.S. While the different credit bureaus have access to the same financial information, your score will likely vary from credit bureau to credit bureau, as they each weigh the information differently. Whenever you try to finance a purchase, such as applying for a car, home, or boat loan, or apply for a credit card or line of credit, the creditors obtain your FICO score; however, your score is not released to you. You can find out your FICO score on your own, but the creditors with whom you apply for financing do not have to provide you with the financial information they find out about you. However, if you are turned down for financing, creditors and lenders are required to provide you with a reason why you were turned down and, if your credit score was a factor, your credit score. They are also required to specify which credit agency they used to establish your credit score.

How to Calculate a FICO Score

Due to the complexity of the statistical analysis used in credit scoring, and the fact that the scoring formulas are not publicly available, you cannot precisely figure your own credit score. However, Fair Isaac has made public the general criteria it uses in calculating credit scores. So, based on information in your credit report, you should be able to tell which items in your report are helping or hurting your credit score.

There are five key factors that go into calculating your credit score, with certain items carrying more weight than others. These factors are as follows:

1. Payment history

Payment history counts for approximately 35% of a score. It is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area.

If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

2. Credit Utilization

Credit utilization counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred.

If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently.

3. Length of positive credit history

Length of positive credit history counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.

4. Mix of types of credit

Mix of types of credit counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

5. New credit applications

The number of new credit applications you have recently completed accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

While you cannot calculate your own credit score accurately, you can review your credit report for on the five factors named above to get an idea of whether the accounts listed on your credit report are hurting or helping your credit score. You can then take action to improve any potential problems, such as paying down your balances or paying off collection items.

Generally speaking, if you are carrying more than $5,000 in credit card debt or are struggling with credit card or revolving debts, you should solve this problem first. If you are interested in applying for help with one of Bill's approved debt help partners, click here: Debt Help.

How to Identify a Good FICO Score

The higher your credit score, the better; however, there is no real industry standard. FICO credit scores range from 350-850. Each creditor or lender judges your credit score differently. They each assign greater or lesser weight to various factors when determining your eligibility and risk. In the past, anything above 690 was considered a great score. Today, you may need a score of over 720 in order to qualify for the best rates available. A credit score below a 620 is frequently referred to as "sub-prime." Any score below 500 is considered a terrible score.

How to Obtain Your Credit Score

If you want to check out your FICO credit score, the Fair Credit Reporting Act requires the three major reporting agencies (Equifax, Experian and TransUnion) to provide you with a complimentary copy of your credit report once every 12 months, but only if you request it (it will not be sent to you every 12 months automatically). However, each agency will most likely have a different score for you depending on the particular credit information provided to that particular agency. So, if you want a better idea of what your credit score actually is, request your credit score from all three agencies and figure out the average.

There are three major credit bureaus that offer credit reports:

To get a copy of your credit report, contact one of these three consumer credit reporting agencies. Each bureau interprets your credit information differently, so you might want to get a report from all three.

By law, you can access one free report every 12 months from each of the three credit bureaus at AnnualCreditReport.com. If you stagger your requests at the site, then you can access one of the bureaus every four months. You can also request a free copy of your credit report if you are denied credit; however, you can only request a copy from the specific credit bureau that supplied the credit report to the creditor who denied you.

How to improve a FICO score

Here are four steps to improve a credit rating:

1. Pay off all debts and keep revolving lines below 30% utilization. Do not "max out" your credit cards.
2. Diversify your credit portfolio. Have a mixture of different types of accounts. For example, you have only a Visa, MasterCard, or Discover card, get a department store credit card or card from a gasoline retailer. Maintain at least three active trade lines in good standing at all times.
3. Make your payments every month on time! Leave a small balance every once in a while to show that you are able to handle debt on more than one account.
4. Keep your oldest credit account active. Remember point number three "Length of positive credit history" discussed above.

Pull your credit report and contest any inaccurate information so that it can be corrected by the credit bureaus. Go to the Bills.com debt self-help center for sample dispute letters. The credit bureaus must follow the rules set forth by Congress in the Fair Credit Reporting Act (FCRA).

If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by the Bills.com credit information page.

Summary

Your FICO score says a lot about you. It is used by creditors to establish your credit ranking and determine your interest rate on loans and financing. The higher your FICO score, the lower your interest rate will be. So stay on top of your monthly credit card, mortgage, and even cable bills, and pay everything on time. If not, your credit could plummet.