Understanding Your FICO Score

You may be wondering what FICO is. It is in fact a company. But let’s start from the beginning. FICO stands for Fair Isaac and Company. Fair Isaac is one of the 12 most influential companies in 2005 according to Intelligent Enterprise.

Fair Isaac was founded in 1959 for the purpose of improving business decisions. By acquiring a wide range of data and assigning that data certain values, the FICO scoring, would improve the ability to make more informed financial decisions.

Fair Isaac developed a software algorithm that the credit bureaus use for the purpose of creating your credit score. Basically, it is a formula that includes a lot of data about you that has a bearing on your financial status. This FICO score can be considered a standard rate of credit risk that lenders, retailers and so forth could use in order to lower their financial risk.

Using the FICO scoring as a guide, businesses can automate their decisions based on those scores. This has proven to be a profitable strategy as well as a financially devastating one. It just depends on which end of the FICO you are sitting.

The three credit bureaus use this software formula for credit scoring. However, each bureau is able to manipulate this formula. So, not all FICO scores are calculated the same.

For instance, let’s take a look at each credit bureau’s scoring range.

Equifax ranges from 300 to 850
Experian ranges from 340 to 830
TransUnion ranges from 150 to 934

Most credit lenders prefer to use Equifax or Experian rather than TransUnion due to the smaller range variants from these two credit bureaus. It may surprise you to know that there are other companies that offer credit scoring. They are hard to find and most of them are dying out.

Understanding your FICO score is not easy. One reason is because the three main reporting agencies do not all arrive at the same scoring conclusions. There are some things you cannot control within your score and some items that can be controlled.

There are five basic categories to every FICO score. Although there are many different elements that make up each category, understanding the basics can help you at least have some idea of what you’re dealing with. They are listed in order of importance.

#1. Your Financial Payment History

This is by far the most important part of your credit score. This category helps the lenders to see how you pay your bills. Do you pay on time, are there any late payments.

#2. Your Credit Debt Ratio

Creditors want to know how much you owe as well as how much credit you have access to. Unused credit cards can be helpful or harmful.

Unused credit is considered as potential debt. Creditors will add into your debt the total payments of all your credit cards when they are used in full.  The ratio creditors like to see varies depending on the type of loan you will be getting. It will also vary between lenders.

This can be confusing because having unused credit can help you if it lowers your credit vs. debt ratio, but still harm you if it raises your credit vs. income ratio too high.

#3. Your Credit Time Line

Your credit history as far as when you actually began to establish and maintain your credit. This includes how long you have had a relationship with any one creditor. Long standing accounts hold more value than newly opened accounts.

#4. The Types of Credit You Have Established

Lenders and creditors favor accounts that have a variety of credit established. They want to see car and home loans as well as revolving credit.

#5. Inquiries, Open Accounts, & Account Balances

Every time your credit report is requested by someone other than you, it affects your credit score. It is not a huge factor, but it does diminish your credit slightly. One way you can lower the impact of credit inquiries is to keep them within a short period of time. For instance, if you are seeking to get a car loan, try not to spread those inquires out over more than a week’s time.

You can also request a copy of all three credit reports before you begin shopping for a home or car loan. You can request that each lender allow you to use the reports you ordered to calculate their offer. Once you are both in agreement and you are ready to accept an offer, you can then allow that lender to make the inquiry if needed. That way you limit the number of inquiries from lenders you will never obtain a loan from.

Your account balances and the number of open credit accounts you have are also part of the scoring process.

These are just the basics of the FICO scoring process. However, even knowing the basics can help you understand how they can affect your credit report.