'FICO Score' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
FICO Score refers to the overwhelmingly most popular and heavily utilized credit score in the United States. The company which created, owns, and manages it to this day is Fair Isaac Corporation. Financial institutions that loan out money employ this FICO score for an individual to assess any credit risk and decide whether or not they will offer the person credit. Sometimes they also consider specific information on the credit report of the borrower, but this is increasingly uncommon.
The reason for this is that the FICO score contemplates a well-rounded set of risk parameters for the would-be borrowers. These five areas it considers and draws upon to issue a credit score for credit worthiness include the individual’s payment history, present amount of debts, types of credit utilized, amount of credit history, and new credit inquiries and issued accounts.
Ninety percent of financial institutions in the United States that offer loans rely on the FICO score for assessing the creditworthiness of an individual. These scores vary from as low as 300 to as high as 850. Generally speaking, scores over 650 represent desirable credit history. Individuals who boast less than 620 conversely typically find it hard to get decent financing offers approved at reasonable interest rates. Financial institutions claim that they also consider various other details besides FICO scores. These include history of time at a job, applicant’s income, and the kind of credit they are seeking.
It is interesting and illuminating to understand how the three main credit bureaus calculate this FICO Score. Fair Isaac Corporation has its proprietary model in which they weigh all categories differently for every individual. This makes it more difficult to say with certainty what percentages in each of the five categories they consider.
Yet generally speaking, payment history represents 35 percent of the total. Amount owed on accounts comprises 30 percent generally. Amount of years of credit history equals approximately 15 percent. Credit mix equates to around 10 percent. New credit inquiries and accounts represent about 10 percent.
Payment history is the simple answer to the question, “does the individual borrower pay the accounts in a timely fashion?” Thanks to the exhaustive nature of credit history, the bureaus clearly demonstrate the payments which have been made for every single line of credit. The reports make special note if any of the payments came in 30, 60, 90, 120, or still more days later than due.
Amounts owed on accounts pertains to the dollar amounts individuals owe on their various accounts as a percentage of the total available credit. This does not mean that possessing a great amount of debt ruins a credit score. What the Fair Isaac Company is considering is the ratio of amount owed to amount available. A clear example shows that when Ringo owed $100,000 yet was not near his limits on any of the accounts, he had a higher credit score than George who only owed $25,000 yet had nearly maxed out his credit card accounts.
Credit history length is a complex category. FICO considers the age of the oldest account as well as the age of the most recent one. They then compile the average account age and come up with a value for this category. Those with shorter credit histories can still get a good credit score.
Credit mix pertains to the variety in types of credit accounts. Higher category credit scores go to those people who have a strong and varied mix of credit cards, retail accounts, and installment loans like mortgages, vehicle loans, and signature loans.
Finally, the Fair Isaac Company does not like recently opened accounts in much of any quantity. When borrowers take out a range of new credit lines and accounts in only a brief amount of time, this tells them that the person is becoming a credit risk and thus decreases the total FICO score.