The FICO Credit Score
You will run into the FICO credit score often. When you apply for credit to finance a car, a home and pretty much everything else, FICO is the credit score commonly used to evaluate your qualifications.
FICO scores are used to qualify customers for over 90% of all purchase transactions involving credit.
Insurance companies use it to set rates, apartment landlords to review potential tenants, and employers screen job applicants with it. Despite the importance of FICO, in most states it is not included in your credit report.
California has been an exception with its law requiring credit reports used in home lending to include a FICO score given to the applicant. Usually you must pay a fee to obtain it, even if your credit report is free.
Most advertisements offering “Free Credit Scores” are designed to have you sign up for credit monitoring services. Otherwise, they are probably not genuine FICO scores and are alternative scores not often used by creditors or lenders.
What Are FICO Scores?
It is the product of the software analytics and credit scoring company named FICO. For most of its existence, the term “FICO” was an acronym for “Fair, Isaac Corporation” (prior to that it was “Fair, Isaac and Company). Now it is simply known as “FICO” to most borrowers.
The company was founded in 1956 but the FICO score itself was created in 1989. It has been the dominant credit scoring method for consumer finance ever since. This is why most people think of it automatically whenever the topic of credit scoring is discussed.
If you want to be sure you know what most creditors see when they evaluate your credit, then you should get your FICO when you check your credit score, not something else.
How FICO Works
The FICO score is essentially an automated system for evaluating credit risk based solely on the data in a borrower’s credit record. It assigns a numerical score ranging from 300 to 850. The higher a consumer’s score, the better.
A FICO of 680 – 700 is viewed as an average credit risk by most lenders, and scores above 740 are considered to carry a low risk of borrower default. These high scores bring the lowest interest rates and insurance premiums, and the best available offers of credit.
Conversely, consumers with low FICO scores of 620 and below are confronted with stiff loan terms, high interest rates, and are often denied most credit promotions. They may even have difficulty finding rental housing and employment, raising important issues for how credit scoring impacts the lives of people in modern society.
FICO’s 5 risk categories:
780 – 850: Very Low Risk
740 – 780: Low Risk
690 – 740: Medium Risk
620 – 690: High Risk
Below 620: Very High Risk
If you like, you can learn more about this at Wikipedia where you’ll find articles on credit scores and the FICO credit scoring system.
Your FICO may be different from one bureau to the next. This is because each of the “Big Three,” TransUnion, Equifax and Experian, have their own ways of retrieving and storing data used in the algorithm that calculates your score.
Making it even more confusing, each of the bureaus has a different name for what is essentially a genuine FICO score: Equifax calls it “Beacon,” Experian refers to it as the “Experian FICO Risk Model,” and TransUnion calls it’s version of the score “FICO Classic.”
Regardless of slight differences in how credit scoring companies generate credit scores, there are factors looked at by all of them. These factors are listed here in approximate order of importance according to the company that created FICO scoring:
- Payment behavior (about 35% of the score)
- Account balances; amounts utilized (30% of score)
- Length of time you’ve had accounts (15%… long credit history boosts scores)
- Types of credit you have, past and current (10% of score)
- How often you apply for credit (10% of your FICO score)
There is some controversy around this last factor, as it has to do with creditor inquiries which show up on your credit report for up to 2 years. In the past, most experts believed that each inquiry could lower your score by as much as 5 points. More recently, this has been modified as creditors recognize that penalizing someone for being a “smart shopper” by applying for several competing credit offers is not a reflection of their ability to make payments on time.
There appears to be some connection between higher credit risk revealed by several repeated attempts at obtaining credit over time without being approved. It suggests that someone may be kind of desperate for credit and the fact that they aren’t being approved can be associated with financial instability.
To more precisely account for this, FICO credit scoring counts successive credit reports generated for mortgages or auto loans as one inquiry if they are done within a few weeks (up to about 45 days) of each other. This would be the case for example, if someone is shopping for a car at different dealerships, or making offers on different homes and shopping for the best loan terms.
A few types of inquiries don’t count at all in FICO Score calculations:
- Pre-approved credit offers you receive
- Inquiries from current creditors reviewing your account
- Inquiries resulting from you requesting your own credit report
You can improve your credit scores within a relatively short timeframe if you are disciplined and methodical. This involves monitoring your credit for errors as well as other items that you will be able to challenge or negotiate to have modified.
We provide resources that guide you through these steps, such as credit repair books with checklists and forms, as well as proven systems that will help boost your scores while improving your credit profile.
If you want to try a 10-day free trial of FICO’s credit monitoring service then you can get your FICO credit score free at: MyFico.com
Credit scoring systems can be confusing. The different names for your FICO score marketed by different credit bureaus is confusing enough, and there’s more: The way the credit score formula assigns relative importance to the different factors used in generating it varies depending on the information in your credit record taken as a whole.
What this means is that any one of the factors listed above for calculating the FICO score can impact your scores differently than they would for someone with a different profile and history. And as your profile changes along with various purchases, payments, shopping activities and other events, so will the importance of the individual factors used in the credit scoring model that determines your FICO score.