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,
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
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.
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
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