What is FICO Score? Definition and meaning
FICO Score is a number that banks and other financial institutions use to measure the creditworthiness of a borrower or loan applicant. FICO stands for Fair, Isaac and Company, a data analytics firm based in San Jose, California, focused on credit rating services – it was founded by Bill Fair and Earl Isaac in 1956.
The FICO Score, a measure of consumer credit risk, has become the standard score in the United States for consumer lending. US lenders use this score when deciding whether to lend you money.
The score is based on a number of factors, including the person’s length of credit history, total amount owed, and payment history.
The approximate makeup of the FICO Score used by U.S. banks and other lenders.
A FICO Score ranges from 300 to 850, the higher your score the better your creditworthiness is estimated to be and the more favorable your loan terms are.
Loan applicants with a score of less than 620 may find it difficult to get a loan at a favorable interest rate.
“Your FICO Scores consider both positive and negative information in your credit report. Late payments will lower your FICO Scores, but establishing or re-establishing a good track record of making payments on time will raise your score.”
FICO score categories
People’s FICO Scores are calculated according to five categories:
– Payment History – 35%: this lists how well or badly the person has been in paying off bills and debts. It will contain data on any bankruptcies, charge offs, repossessions, foreclosures, late payments, liens, judgments and settlements.
More than 90% of all banks and lenders in the United States use the FICO Scores when deciding whether to approve a loan.
Amounts Owed – 30%: includes six different metrics in the debt category, such as the number of accounts with balances, debt to limit ratio, amount owed across different kinds of accounts, and how much was paid down on installment loans.
Length of Credit History – 15%: also known as Time in File. As a person’s credit history spans a longer period, his or her FICO score may improve. This metric takes into account the average age of the person’s accounts and the age of his or her oldest account.
Credit Mix – 10%: types of credit used, such as revolving, consumer finance, mortgage and installment. Consumers who have a history of managing different kinds of credit will have a better score.
Recent Credit Searches – 10%: includes hard credit inquiries and recent searches for credit. These occur when applicants apply for a loan or credit card. Too many searches can harm your credit score.
Importance of each category varies
Your FICO Score is calculated based on these five categories. The importance of each one may vary, depending on a number of factors. Individuals who have been using credit for a long time will be factored differently from those with a shorter credit history.
How important a particular factor is in a person’s credit score calculation depends on the overall data on their credit report. For some consumers, one factor may have a greater impact than it might for somebody else with a very different credit history.
Over time, as your credit report changes, so does the importance of any factor in determining your creditworthiness.
It is therefore not possible to accurately measure the precise impact of a single factor in how a credit score is calculated without looking at the whole report.
— Bigger Than A Boss (@biggerthanabos) 24 August 2016
Access to your credit report
As a result of the FACT Act (Fair and Accurate Credit Transactions Act) of 2003, every US legal resident is entitled to receive a free copy of his or her credit report from each credit agency – Transunion, Experian and Equifax – once a year.
The credit reports have no details on individuals’ credit scores from any of the three agencies.
Experian, Equifax and Transunion run a website where users can obtain their free credit reports.
Non-FICO credit scores are available as an add-on feature for a fee of (usually) $7.95.
Beware of ‘imposter’ websites. The Federal Trade Commission has the following warning:
“Only one website is authorized to fill orders for the free annual credit report you are entitled to under law — annualcreditreport.com. Other websites that claim to offer ‘free credit reports’, ‘free credit scores’, or ‘free credit monitoring’ are not part of the legally mandated free annual credit report program.”
FICO Scores don’t include:
Your credit score does not have information regarding:
– Your marital status, religion, national origin, sex, color or race.
– Your age (other types of scores might – not FICO).
– Your occupation, employment history, title, employer or salary.
– Your address.
– Current interest rates on any type of loan, credit card or account.
– Data on child or family support obligations.
Your FICO Score does not count requests that you personally have made for your credit report.
Improving your FICO Score
It is possible to improve your score, but it can take time – there is no ‘quick fix’. Financial advisors warn that many quick-fix efforts have a high risk of backfiring. Any claims made by firms and agencies regarding quick-fix solutions should be treated with extreme caution.
In order to improve your credit score you need to show over time that you are able to manage your finances responsibly. The first thing to do is get a credit report from one of the three agencies.
Below are some tips on improving your FICO Score:
– Dispute errors; mistakes can happen. If you think there is a mistake in your credit report, you should contact TransUnion, Experian or Equifax online.
– Keep balances as low as possible on credit cards and other revolving credits.
– Do not move debt around; pay it off.
– As a short-term measure to raise your score, do not close unused credit cards.
– Do not apply for a number of new credits cards that you have no need for, just to raise the amount of available credit. This approach might actually harm your FICO Score.
– Do not open credit accounts just to widen your credit mix; it is unlikely to improve your credit score. Only apply for new credit if you need it.
– Having credit cards and installment loans is fine, as long as you make timely repayments.
– Make sure the credit agencies know about court judgments that you have resolved (to the satisfaction of the lender).
Experian.com makes the following comment regarding improving your credit score:
“If you have negative information on your credit report, such as late payments, a public record item (e.g., bankruptcy) or too many inquiries, you may want to pay your bills and wait. Time is your ally in improving your credit scores. There is no quick fix for bad credit scores.”
Video – What’s in my FICO Score
This myFICO video explains how your score is calculated.