The FICO Score

FICO is an acronym referring to Fair Isaac Corporation. This company compiles credit history data among three credit bureaus: Experian, Equifax, and TranUnion. About 90% of lenders use this metric to determine creditworthiness. Small local banks may underwrite loans via in-house analysis of the individual or business seeking to borrow.

There are actually 19 different FICO scores a lender commonly use depending on the purpose for which credit is being sought. Maybe you’re signing up for a store card to receive a 30% discount on a purchase. This is often done on the spot with FICO Bankcard Score 8, the most widely used.

But if you’re borrowing a large sum to purchase a home, this could entail a deeper search using FICO Score 2, 4, or 5. This will depend on which of the three bureaus the lender uses.

All FICO scores incorporate 5 components using the following ratios:

1. 35% Payment History – Do you pay on time?
2. 30% Outstanding Debts – How much have you already borrowed? This can include un-utilized credit cards.
3. 15% Length of Credit History – For how long have you been borrowing?
4. 10% New Credit – How often have you applied for credit in the recent past?
5. 10% Credit Mix – What does your “loan portfolio” look like?

Credit repayment tops the list. More than a third of your credit score comes from making timely payments.

Interpreting FICO scores

• 800-850 Exceptional – Lenders love you!
• 740-799 Very Good – Many people are here…
• 670-739 Good – Minimum for mortgages…
• 580-669 Fair – Examine one or more of the 5 components
• 300-579 Poor – High interest consumer finance
• 0 – No credit score because you never borrow

Look at your full credit report every year Share on X

Tracking Your FICO Score

As long as an individual continues to use credit – not necessarily “debt” – the FICO scores will be important. As an example, having a good score allows you to receive a phone bill rather than having to prepay.

Get Your Free Credit Report Every Year

To obtain your credit report, go to annualcreditreport.com. Federal law permits you to receive a full credit report on yourself once a year for free without dinging your credit. Besides the site, you can call 877-322-8228.

Hard credit inquiries can remain on your credit report for up to a year. But your score may only take a minor dip when you get sniffed for something like PLUS loans in each July.

If a mistake appears on your credit report, notify the credit bureau with the mistake by certified mail with return receipt. Send the agency proof of the error. They have 30 days to respond.

Until an individual is debt-free – and maybe has no FICO score – keep making on time payments. And of course avoid opening new accounts.