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What in the world is a FICO score?

Your FICO score is the dominant method lenders use to assess how deserving you are of their credit. Whether you're looking to get a mortgage, car loan or home-equity loan, you're going to get scored.

Named after Fair Isaac Corp., the firm that developed the scoring model used by the three major credit bureaus -- Equifax, Experian and Trans Union -- your FICO score is calculated using a computer model that compares the information in your credit report to what's on the credit reports of thousands of other customers.

FICO scores range from about 300 to 900. Generally, the higher the score, the lower the credit risk. It's very difficult to say what's a "good" or "bad" score, though, since lenders have different standards for how much risk they will accept. "A credit score that one lender considers satisfactory may be regarded as unsatisfactory by other lenders for comparable credit instruments," says Fair, Isaac Senior VP Cheryl St. John.

Scores also fluctuate depending on credit activity. Since credit bureaus only calculate your score at the lender's request, it will be based on the information in your file at that particular credit bureau, at that particular time only.

The Fair, Isaac model takes into account five factors when evaluating your credit worthiness (You can estimate your FICO score using the free FICO Score Estimator):

Past payment history
About 35 percent of your FICO score is based on this, which includes late payments, delinquencies and bankruptcies. The fewer the late payments, the better your score -- though a recent late payment hurts your score more than one from five years ago.

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Outstanding debt
About 30 percent of your FICO score, this includes what you owe on your credit cards and how much you owe on installment loans, compared with the original amounts of the loans. Someone who uses a high amount of available credit (say 75 percent) is a greater risk than someone who uses only 25 percent according to Fair, Isaac.

How long you've had credit
How long you've had accounts and how often you use them, this accounts for about 15 percent of your FICO score.

New applications for credit
According to Fair, Isaac, "research shows that opening several credit accounts in a short period does represent greater risk, especially for people who do not have long-established credit history." This makes up about 10 percent of your FICO score.

Types of credit
Making up about another 10 percent of your FICO score, this includes credit cards and loans, including installment and mortgage loans.

Bear in mind, however, that U.S. law forbids personal information such as ethnicity, religion, sex or marital status from being reflected in your FICO score.

The main benefit of credit scoring, lenders argue, is that an automated system allows for faster decisions. Keep in mind, too, that a credit bureau score isn't the only factor lenders take into account when considering your loan application. "A consumer can have a very good credit score and still not be approved for a loan due to other reasons, such as insufficient income or down payment," Fair, Isaac's St. John says. Other factors, such as length of time at your current employer and the value of other collateral can also influence a lender's decision.

-- Updated: June 2, 2003

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See Also
Credit scores explained
5 steps to improving your credit score
Credit repairing FAQ
Investing glossary
Free! FICO Score Estimator
More investing stories


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