It’s a little three digit numeral that holds your financial future in thrall. Comprised of numerous factors weighted in different fashions, it signifies to lenders whether you are a good risk for a line of credit. So what is this collection of numerals, how is it calculated and what does it mean? It’s a FICO score and it is reviewed by over 90 percent of all lenders as an indicator of your creditworthiness. Simply put it is a major deal.
What is a FICO Score and How is it Determined?
The Fair Isaac Corporation or FICO for short is THE top dog when it comes down to credit scoring semantics. The lowest score is 300 and the highest is 850. It is ascertained based on the following five conditions:
Payment history: Always, always, always pay your bills on time because each time you don’t your FICO score will drop. That is deduced upon on how many days it is submitted after the due date, the amount of the payment and how many times this has transpired. Also, judgments, liens, foreclosures and bankruptcies on your record are extremely detrimental to your FICO score. Your payment history is 35 percent of your total FICO Score.
How much credit you use: What are the balances on all of your open accounts? This includes credit cards and how much you have used of your credit line in comparison to what your total credit limit is. If you are carrying a big balance, that FICO score will not be on the upper end of the scale. This accounts for roughly 30 percent of your entire score.
How long you have established credit for? The typical rule is the longer period of time you have credit, the better your FICO score will be, but people with less established histories can certainly have good FICO scores if they use their credit lines responsibly. Credit histories typically factor in for about 10 percent of your final score.
What kind of credit do you possess? This situation does not have a major impact on your FICO score (10 percent) because it is ultimately much more about your credit history as a whole rather than what accounts you have open or have closed in the past.
How much new credit have you attempted to receive? If you are filling out applications for a fistful of new cards, loans or mortgages your FICO score will drop, especially if your credit has not been established for a considerable length of time. New inquiries remain on a credit history for 24 months but only impact your FICO score for a year.
All these circumstances are placed into a formula or algorithm that spits out that three digit number. There are other credit scores available that are used, but the primary number by far is your FICO score so that should always be relied on for to know your credit worthiness.
What Role do Credit Reporting Agencies Play?
Now that we have nailed down what a FICO score consists of and why it is so essential to your financial health, what is the deal with the three credit reporting agencies? TransUnion, Equifax and Experian each follows their own equations to produce its own three digit number. You now know what a FICO score is, but did you know that you could possibly have a different FICO score for each company based on the guidelines governing their own data? Unless there is some serious complication or mistake, these scores should all be quite close to the same number. Bear in mind, however, just because you receive a credit score do not automatically assume it is your FICO score. Always look for that “FICO” notation next to the number to know if that is the right one.