How to Understand FICO and Credit Scores
FICO Scores in Higher Ranges Can Mean Big Savings!
FICO® is an acronym for Fair Isaac Corporation, the company that created the most widely used and best-known method for determining credit scores in the U.S. FICO scores are normally used by banks and/or other loan providers to determine a persons’ eligibility for credit.
To best assist you, we’ve put together a guide that can help you understand how FICO scores are determined.
What makes up the FICO score?
This list explains, by percentage, how the FICO Score is determined.
FICO scores are the credit scores lenders use to determine your credit risk. You have three FICO scores, one for each of the three credit bureaus - Experian, TransUnion, and Equifax. As your credit information changes, your scores are likely to change too.
- 35% = based on payment history (i.e. on-time pays or delinquencies). More weight is given to current pay history (see below for further reference)
- 30% = capacity (You can determine your capacity by the number of loans that have balances versus the limits on the loans. Open credit cards with little or no balance can help your capacity.)
- 15% = length of credit
- 10% = accumulation of debt in the last 12-18 months
- No. of inquiries
- Opening dates
- 10% = mix of credit
- Installment payments (raises) vs. revolving charges (lowers)
- Number of finance company loans - the more, the lower the score
What actions can hurt the FICO score?
- Missing payments (regardless of dollar amounts, it will take 24 months to restore credit with one late payment)
- Number of credit cards at capacity (i.e. maxed out credit cards)
- Closing credit cards (this lowers the available capacity)
- Shopping excessively for credit
- Opening up numerous trades in a short period of time
- Having more revolving loans in relation to installment loans
- Borrowing from finance companies
What doesn’t affect the FICO score?
- Debt Ratio (how much you owe vs. how much you earn)
- Income
- Length of residence
- Length of employment
Approximate credit weight for your payment history.
- 40% = current to 12 months
- 30% = 13-24 months
- 20% = 25-36 months
- 10% = 37+ months
Improve your FICO score!
Below are some tips to help you improve your FICO score.
- Pay down on credit cards
- Do not close credit cards because capacity will decrease
- Continue to make payments on time (older late pays will become less significant with time)
- Slow down on the opening of new accounts
- Work towards a solid credit history with years of responsible performance
- Move revolving debt to installment debt
