Chapter 1. The Origins of FICO
First of all, let’s briefly discuss the origins of FICO (Fair Isaac Corporation). Back in 1956 many were introduced to credit scoring by two pioneers in the field: engineer Bill Fair and mathematician Earl Isaac. Over the years, the pair convinced lenders that mathematical formulas could do a better job of predicting whether an applicant would default than even the most experienced loan officers. Thus, the birth of your FICO score.
Understand that there are now many different credit scoring models in existence today, but because FICO was the first, banks and lenders tend to gravitate toward them by default. The mathematical algorithms that FICO use to determine your credit score are very closely guarded trade secrets. The FICO scores range from 300 to 850. Scores from 680 to 699 are considered “good”. Scores from 700 to 720 are typically considered “excellent”.
Chapter 2. What Makes Up Your FICO Score?
1) Generally speaking:
- 35% Payment history
- 30% Amounts owed
- 15% Length of credit history
- 10% New credit
- 10% Types of credit used
Chapter 3. A More Detailed Breakdown of Your FICO Score:
1) Payment History
- Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
- Severity of delinquency (how long past due)
- Amount past due on delinquent accounts or collection items
- Time since (how recent) past due items (delinquency), adverse public records (if any), or collection items (if any)
- Number of past due items on file
- Number of accounts paid as agreed
2) Amounts Owed
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
3) Length of Credit History
- Time since accounts opened
- Time since accounts opened, by specific type of account
- Time since account activity
4) New Credit
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problems
5) Types of Credit Used
- Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
Please note that:
Section 1. A FICO score takes into consideration all these categories of information, not just one or two.
No one piece of information or factor alone will determine your score.
Section 2. The importance of any factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.
Section 3. Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
Section 4. Your score considers both positive and negative information in your credit report.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.
Chapter 4. How Can You Get Your FICO Score?
Another very important thing you, the consumer, need to understand is that you actually have 3 FICO scores. You have a separate score for each credit bureau, Experian, Equifax, and TransUnion. The only way you, as a consumer, can purchase your FICO score is by going to www.myfico.com. There, for a fee, you will be allowed to purchase your FICO scores and credit reports. There is a slight caveat. As of February 13, 2009, Experian decided it no longer wanted the consumer to be able to purchase their Experian FICO scores. Now the only people who can check your Experian FICO score are banks and lenders. Experian did not give a reason for this decision.
Your TransUnion and Equifax FICO scores and credit reports are readily available for you to purchase and to view at www.TrueCredit.com. The FICO website, myfico.com also has a wealth of free information about credit and credit scoring.
Chapter 5. Does Purchasing My Credit Score Damage My Credit?
You are allowed, by law, to have access to your credit reports FREE every 12 months through www.annualcreditreport.com. If you need to see your credit report more than once a year you can use www.TrueCredit.com. The law does not state that you have access to your credit SCORES for free at all (at least not yet). When a bank or a lender accesses your credit for the purpose of determining loan qualifications, this causes a HARD inquiry on your credit, which does damage your credit slightly. When you, the consumer, access or purchase your credit reports and scores on your own, this causes a SOFT inquiry, which does not damage your score. Feel free to access your credit reports and scores anytime you wish!
Chapter 6. In Summary
The next time you are ready to make that purchase or apply for that loan, do yourself a favor and purchase your FICO credit scores from www.TrueCredit.com prior to walking into the loan office. Having that advanced “heads up” in knowing what the loan officer will see, may save you some potential embarrassment and it might also send you in with added confidence. Happy loan shopping to you all!