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Understanding Your FICO Score
Your FICO Score is determined by a complex computer program that weighs 5 separate aspects of your credit history—and which then tries to predict, to prospective creditors, how likely you are to pay them back as promised.
According to Fair Isaac Corporation, the company that invented the FICO credit-risk score, FICO Scores are calculated from many pieces of credit data in your credit report. The percentages reflect how important each of the categories is in determining your score.
These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.
1. PAYMENT HISTORY (35%)
- Account payment history on specific accounts: (credit cards, retail-store accounts, installment loans, auto loans. insurance company accounts, mortgage, etc.)
- Adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past-due items)
- Severity of delinquency (how long was an account past due)
- Amount past due on delinquent accounts or collection items
- Time since past due items, adverse public records, or collection items.
- Number of past-due items on file
- Number of accounts paid as agreed
2. AMOUNTS OWED (30%)
- Amount owed on accounts
- Amount owed on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
3. LENGTH OF CREDIT HISTORY (15%)
- Time since the accounts were opened
- Time since accounts opened, by specific type of account
- Time passed since account activity
4. NEW CREDIT (10%)
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problems
5. TYPES OF CREDIT USED (10%)
- Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
The most important thing is to know your FICO score and to ensure that your credit history is correct. Conveniently, Fair Isaac has created a web site (www.myFICO.com) that let's you do just that. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available is some helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.
Armed with this information, you will be a more informed consumer and better positioned to obtain the most favorable mortgage available to you.
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