FICO Score 101

Ever wanted to know what FICO stands for?  And then ever wonder what is your FICO score and why does almost every lender bring it up?  

FICO is an acronym for the Fair Isaac Corporation.  They created the formula that produces a numerical summary of your financial history as a number, which is called a FICO score or credit score.  A credit score may be a low as 300 or as high as 850.  A higher credit score signifies a higher level of credit worthiness.  There are three main credit bureaus that maintain financial records and provide lenders with credit scores: Equifax, TransUnion and Experian.  

There are five main sections that comprise your credit report that is used to calculate your FICO score.  Each section carries a different weight towards your FICO score. 

Payment history

Payment history comprises 35% of your score.  This section carries the most weight because your past payment history is a good determinant of how well you will pay your accounts in the future.  A late payment will have a negative impact on this section.  Bankruptcies and accounts that have been sent to collections also have a negative impact on this section.  Recent activity carries more weight than aged activity.  Therefore, recent late payments decrease your score by a greater amount than aged late payments.

Credit Utilization – 30%

This is the amount that you currently owe versus your credit limit.  If you have your credit cards maxed out it will lower your score.  Having credit card balances less than 30% of the limit is a good rule of thumb.

Age of history– 15%

The longer you’ve had credit the better is looks for you because it allows lenders to better predict what your future credit actions might look like.

Mix of accounts – 10%

The type of accounts you have is important.  While there is no perfect formula for the kinds of credit accounts you should have, it is good to have loans as well as revolving credit.  This part of your score will come into play more when you don’t have a lot of other information in your credit report.

Inquiries – 10%

Applying for a lot of credit cards or loans in a short period of time creates multiple inquiries on your credit report.  To a lender, this could look like you are taking on a lot of debt or you are in financial trouble.  Neither of which is desirable from a lenders point of view.  Inquiries that are more recent have more of an affect on your credit score.

If you are looking for ways to improve your credit score, these five areas are the ones for you to focus on.