Understanding FICO Scores
What is FICO and what is it used for?
FICO is a score created by collecting a range of personal credit information. This score is used by lenders predict consumer behavior, such as how likely someone is to pay their bills on time (or not), or whether they can be issued an increase on their credit line.
The name FICO comes from the company’s original name, the Fair Isaac Co. It was often shortened to FICO and finally became the company’s official name in the late 1980s. To create credit scores, FICO uses information provided by one of the three major credit reporting agencies — Equifax, Experian or TransUnion. FICO itself is not a credit reporting agency. However, a FICO credit score is the most widely used among lenders and predicts the probability of delinquent accounts. There are other scores lenders can choose from also, such as the VantageScore and TransRisk Score.
What Is a Good FICO Score?
There are dozens of FICO scores. Lenders use different FICO scoring models for different purposes. For example, auto loans, home loans, and credit card applications all use similar but distinct FICO scoring models. Generally, the FICO score range is 350 to 850. The higher number, the less risk a person represents to the lender or insurer.
Consumers with excellent FICO scores (typically a 720 FICO score or higher) are likely to get the best rates when they borrow, as well as the best discounts on insurance.
What Goes into FICO Scores?
Five main factors go into FICO scores, and they each have a different effect on your score. Here’s the breakdown:
- Payment history (35% of the FICO score)
- Mix of credit (10%)
- New credit and/or inquiries to credit reporting agency for additional credit (10%)
- Length of credit history (15%)
- Capacity – shows the percentage of your revolving credit available (30%)
All these factors are considered in different scoring models. A person with a strong FICO score will likely have a strong score with other models as well.
According to FICO, the scores do not consider anything that isn’t on your credit report, which includes your race, religion, national origin, sex, marital status and age.
Here are some other things that FICO says it does not factor into its scores:
- Participation in a credit counseling program
- Employment information, including your salary, occupation, title, employer, date employed or employment history
- Where you live
- The interest rates on credit accounts
- “Soft” inquiries (requests for a credit report to review scores)
- Any information that has not been proven to be predictive of future credit performance
FICO scores can change frequently and can be improved by practicing good financial habits.
To obtain and maintain a good FICO score:
- Pay all your bills on time – your payment history is the largest factor in your score.
- Apply only for the credit that you need.
- Refrain from using too much of the credit limit available to you – be mindful of Capacity, which is the ratio of income to debt. Pay down your debt, but don’t close your accounts.
- Review your credit report every year and dispute any errors found.
Get Your Credit Score
You can't improve what you don't know. Attend one of Skyward’s quarterly Credit Score Enhancement Seminars to receive and learn how to manage your personal credit report. To sign up, call us at 316-425-0961.
For a free copy of your credit report, go to AnnualCreditReport.com.