What is a FICO Credit Score?

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Maybe you’ve applied for credit, or are interested in buying a home, and you want to know – what is a FICO® credit score?  Also, you want to know if your credit score is good or not.  Although the range for the FICO® score is 300-850, it’s important to know a score of 625 is definitely not equal to a “C” in college.  Here we’ll discuss how your score is determined and what it means.

What Makes Up a FICO® Credit Score: How Do They Come Up With This Number?

There are five categories of information that are complied and calculated in such a way that they comprise your credit score.  They are the following:

Payment History – 35%

Type of Debt and Amount Owed – 30%

How Long You Have Used Credit – 15%

How Many Different Kinds of Credit Accounts You Have – 10%

The Number and Types of Accounts You’ve Opened in the Last Six Months – 10%

Let’s examine each of these categories a little more closely.

Payment History

Whether you pay on time or not can be a deal breaker in the credit world.  How much you owe and if you pay on time are the two biggest factors in determining if you are a decent credit risk.  Check to see if the information recorded accurately depicts the severity of your outstanding debts and your payment history.

Type of Debt and Amount Owed

This information is broken down into categories – how much debt you owed, and of what kind – revolving (such as a credit card or line of credit), installment, or mortgage, secured or unsecured.  The bureau looks at how much you owe in relation to how much you are allowed to borrow (your credit limit.)  For instance, if you have some credit cards open with no balances on them, the proportion of credit available to the amount used reflects positively on you.  If you have maxed out every credit card you own, this will reflect poorly on you.

How Long You Have Used Credit

If you have a short credit history (less than two years), your score may be lower just because the credit bureau has so little to go off.  Accounts that have been opened for years reflect positively on your score, while accounts opened only for a short while do not help your score in the same way.

How Many Different Kinds of Credit Accounts You Have

Some types of credit are considered riskier than others, so the type of credit accounts you have affects your score.  Revolving credit (credit cards) is more risky than a mortgage.  It’s best to have a mix of different types of credit – this looks the most stable to lenders.

The Number and Types of Accounts You’ve Opened in the Last Six Months

Lenders become suspicious when a debtor applies for several new forms of credit in a short period of time because they worry that you will not be able to handle the load of credit you take on.  This is why the number of inquiries can make a difference when calculating your credit score.

Who Came Up With This FICO® Credit Score Anyway?

A corporation named the Fair Isaac Corporation came up with the formula used to calculate the credit score used by most lenders and considered the industry standard. Fair Isaac Corporation has a contract with Equifax, so Equifax is the only one of the three big credit bureaus who can sell you the actual FICO® credit score.  The other two big credit bureaus (Experian and TransUnion) both use similar methods to calculate their own scores.  It’s generally considered best to get the actual FICO® score.

Interpreting Your FICO® Credit Score

The average credit score is between 675 and 700.

Approximately one fifth of Americans have scores above 780.

One fifth have scores between 745 and 780.

One fifth have scores between 690-744.

One fifth have scores between 620 and 689.

One fifth have scores below 620.

The tricky things about credit scores in there is no universal interpretation of what is good enough.  Each lender has its own interpretation of what will be good enough for them to offer their best interest rate or extend the largest amount of credit.  However, you can be sure that if your credit is in the upper twenty percent, you have an excellent credit rating, and you will be eligible for better rates and opportunities than someone who is in the mid or lower groupings.

One way to get an idea of how your credit rating will affect your ability to access credit at lower interest rates (and how your credit score measures up) is to take a look at http://www.myfico.com/CreditEducation/.  There you’ll find an actual chart citing FICO® credit scores and corresponding interest rates for thirty-year fixed mortgages.  This chart uses current national interest rates.

Many lenders take into account the specifics of your credit report before extending an offer, meaning certain lenders consider certain information more pertinent to their branch of lending when considering you as a potential borrower.  For example, a credit card company will more heavily weigh any credit card debt on your report.  If you have always been timely with your mortgage payments, but have been late on credit card bills, you may not get as good an offer.

Your credit score will determine whether a credit card company is willing to extend you a platinum card with low interest rates and a large amount of credit, or if they are only willing to give you the standard card with a higher interest rate.  The same goes for mortgages and loans.

A new credit score option which has recently come out is the VantageScore –a new scoring system devised by Equifax, Experian and TransUnion together.  This scoring system has a grade letter assigned to each rating.  While it is not the score officially used by most lenders at this time, it can give you an idea of your relative score rating.  See www.VantageScore.com for details.

Action Points

-       Purchase a copy of your credit score

-       Determine how you can work towards improving your credit score

-       Continue to educate yourself on ways to improve your credit