The FICO score is the most common credit score you will encounter in the United states. The FICO score was created by the Fair Isaac Corporation at the request of the major three credit unions (Experian, Equifax, and TransUnion) to help standardize their reporting and to provide a quick measure of the risk of lending to the scored individual. This article will cover the main factors that influence your score and some ways to improve it. Your score will be a 3 digit number and fall into one of these categories.
<580 a high risk investment
580-669 a more risky investment than average but many lenders will still deal with you
670-739 near average rating for the US
740-799 above average in the U.S. and shows you are a reliable investment
800+ shows you are an exceptionally low risk investment
“To determine credit scores, the FICO weighs each category differently for each individual. However, in general, payment history is 35% of the score, accounts owed is 30%, length of credit history is 15%, new credit is 10%, and credit mix is 10%.” (Fair Isaac Corporation, 2020)
Your payment history is the most influential part of your score and mainly just tracks if you pay your bills on time. Recent events are weighted more than older events so if you miss a payment don’t worry too much. As you continue to make payments on time, these will overshadow the earlier mistakes. Those with a very short credit history will use different weighting for payment history than those with a longer history to compare. The normal accounts that would be tracked include credit cards, retail accounts, installment loans, and mortgage loans. Some factors like lawsuits and wage attachments can affect your score for years after they occur. Bankruptcy for example stay on your credit report for 10 years for a chapter 7 and 7 years for a chapter 13.
Next up we have the amount owed. This is less about the total amount that one owes and more about the percentage of your likely credit that has been used. A person that is using more of their credit than average will be more likely to miss a payment if they take on more debt. Using a lot of your credit does not mean that you will miss a payment, just that it may be harder for you to meet all of the obligations you have collected.
The length of your credit history helps to show if you consistently pay your debts on time. For this measure it may be beneficial to keep older lines of credit open even if you don’t intend to use them as they help to push up the average age of your accounts. In the same manner opening several new lines of credit in a short period will tank this measure because the average age of your accounts will plummet.
The last two factors for your score are new credit and the credit mix, they only account for 20% of the score together but they should not be overlooked. The number of new lines of credit as well as the mix of loan types can be an indicator that the borrower may be in financial distress. On the other hand, opening accounts slowly and diversifying your debt can actually raise your score as you prove you can handle different types of loans.
Finally it is important to check your credit score regularly. When a creditor checks your score in response to a loan request that will impact your score. It is advised to do your loan shopping within a 30 day period to reduce the impact this will have on your score. When you request a report on yourself directly from Experian, Equifax, and TransUnion this does not affect your score. You are entitled to one free credit report every 12 months from each of the three major credit unions in the US. For further information on the free report see the FTC link below Since each company has their own record for you they may not have the same information. Errors can impact your score and the potential loans you can acquire so checking is prudent and you do have the right to dispute claims found in the reports. For further information on the FICO score and how to improve it review the “myfico.com” link below.
Marcus A. Baker
Fair Isaac Corporation. “Frequently Asked Questions About FICO Scores,” pages 2-4. Accessed August 21, 2020.