Your FICO Score

The Fair Isaac Corporation, or FICO, scoring model is a statistical means of assessing how likely you are to pay back a loan. Used by each of the three national credit-reporting agencies, it measures the degree of risk that you represent to a lender. The score is based on all credit-related information contained in your credit file. The score does not factor in income, assets, or bank account balances. Neither are age, sex, race, color, religion, occupation, marital or homeownership status, length of time at your present address, or zip code used to calculate your score. (Individual lenders, however, may consider some of these factors when determining whether or not to extend credit.)

FICO scores range from roughly 375 to 850 points. Acceptable scores can vary according to lender and the type of credit that you're trying to obtain. Scores fall into three approximate categories:

  • Above 680 - You're generally considered to have good credit; of course, the higher your score the better.
  • 620 to 680 - Your credit is questionable. This doesn't automatically mean that you won't be approved, but you'll likely have to provide more documentation to the lender in order to satisfy its requirements.
  • Below 620 - Poor credit. If you're approved at all, you'll have to pay significantly higher interest rates.

FICO scoring uses mathematical tables that assign points to different aspects of a consumer's profile and credit record. Fair Isaac uses credit data on millions of consumers, and applies complex algorithms to research credit patterns that can be used to predict how a consumer will perform with regard to their future credit responsibilities.

FICO scoring formulas are top secret. Other than the companies that created the system, no one really knows precisely how many points are assigned to each particular credit factor, but the five main areas that are reviewed for scoring are these:

  • Payment history - This area shows how you've paid your debts. Included is any derogatory information such as frequent delinquencies, collection accounts, late payments, and charged-off accounts that are noted in the trade line section of the credit report. Public records are also documented, such as tax liens, judgments, and bankruptcies.
  • Outstanding credit - This includes the number of balances recently reported by creditors, the average balances, and the relationship between the total balances and total credit limits on revolving trade lines. If your balances are too close too their limits, your score can suffer.
  • Credit history - Factors that are taken into account are the age of your oldest trade line, and the number of new trade lines. Trade line activity within the past two years is weighted more heavily than older activity.
  • New credit inquiries - The number of inquiries and new account openings in the past twelve months are heavily weighted. Recent and frequent inquiries can lower your score.
  • Types of credit - Trade lines generally fall into one of two categories: revolving (or open-ended) or installment accounts. Revolving accounts include credit cards and lines-of-credit. Mortgages and car loans are examples of installment accounts. Having accounts in both categories can boost your score.

The newly instituted PLUS Score is comparable to the FICO; however, it's touted to be somewhat easier for the average consumer to understand. Developed by Experian, the PLUS Score uses a formula similar to those employed by creditors, which affords consumers a 'lender's-eye view' and thus more insight into their credit files.