Tuesday, October 21, 2008

What the heck are FICO scores anyway?

Your Credit Score

Fair Isaac & Company invented the FICO credit risk score that lenders started using in the 1960s. This approach to lending enabled financial institutions to improve their business performance and expand consumers’ access to credit. Today Fair Isaac’s FICO score is widely recognized as the industry standard for lenders.

What is your score specifically designed to tell you?

It predicts the likelihood that your borrower will get a 90 day late on any trade line, within the next 24 months.

What is the range of credit scores?

Generally 300 – 850 (850 being perfect credit)

What is your score comprised of?

35% Payment History
30% Balances
15% Credit History
10% Type of Credit and number of each type
10% Inquires

Payment History

Recency – The most heavily weighted factor in the entire score model. When did it happen? 0-6 Months – Your score can be hit over 100 points. 7-24 months – Slightly hit (25 to 50 points). 25+ months – Not much of an effect.

Frequency – Being frequently late is weighted into the score.

Severity – Public records, judgments, tax liens are more heavily weighted.

Balances

Balances that exist on revolving charge accounts (Visa/MasterCard) are weighted more than high balances on installment loans.
If you have charged in excess of 50% of your credit limit, your score will go down at least 100 points.
If you have charged in excess of 75% of your credit limit, your score is dropped drastically.
If you keep less than 10% of your credit limit, you actually earn more points than paying them off completely.

Credit History

Your credit history is the length of your credit.
30 years history is considered excellent credit.
Three to five trade lines is best.

Type of Credit and Number of Each Type

Counts open and closed trade lines.
Finance company installment account, i.e. Levitz Furniture, affects your credit negatively.

Inquiries

Depending upon your credit and length of credit, inquires affect your credit differently.
Someone with a short length of credit history will get 30 points deducted off their score, versus someone with a longer credit history will get 10 points deducted and be allowed more inquiries.
Promotional inquiries do not affect your score.


I plan on providing more information about credit agencies as well as help that is presently available for consumers. Feel free to comment and let me know exactly what kind of information you are interested in having available!

1 comment:

Gretchen said...

Great information, Harriet. Someone's FICO score can sure make a big difference in the interest rates on loans that they can get.