Understanding FICO Score

Understanding FICO score is the first step towards building a good credit history

What is a FICO score? A FICO score is a credit score developed by Fair Isaac & Co. It is used by creditors to determine your credit worthiness. Essentially, it is an attempt to condense your entire credit history into one number. Your FICO score is derived from mathematical models that assign scores to many factors. There are really three FICO scores that are computed by the three major credit bureaus - Experian, Trans Union and Equifax. When you make a loan application, a creditor will check with either one or all three credit bureaus to determine the rate that you will be charged on your loan.

According to MyFICO.com, FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories.

The first is your payment history, the amounts owed by you, your length of credit history, any new credits that you have and the types of credits used by you. For the average person, the importance of payment history is about 35%, amounts owed about 30%, length of credit history about 15%, any new credits about 10% and the types of credit used about 10%.

To be more precise, these five categories can be broken down as follows :

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Payment History
  • Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
  • Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
  • Severity of delinquency (how long past due)
  • Amount past due on delinquent accounts or collection items
  • Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
  • Number of past due items on file
  • Number of accounts paid as agreed

Amounts Owed
  • Amount owing on accounts
  • Amount owing on specific types of accounts
  • Lack of a specific type of balance, in some cases
  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
  • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History
  • Time since accounts opened
  • Time since accounts opened, by specific type of account
  • Time since account activity

New Credit
  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems

Types of Credit Used
  • Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

It is important to note that though your current employment or salary is not part of your fico score, creditors may require these information from you when you request a loan. The importance of the five categories may vary depending on the length of one's credit history and circumstances as well (these are not set in stone).

By now, you should have a basic understanding of what goes into your fico score. This is the first step to get started on establishing a good credit history.

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