FICO SCORES



FICO Scores are a 3 digit score used by credit agencies to rate a potential borrowers credit worthiness. The FICO score was developed by Fair Isaac Company (therefore the acronym FICO) in the 1950's and has been universally adopted by the three main credit rating agencies, Equifax, Experian, and Trans Union. FICO scores range from 300 to 850. The credit rating agencies do not disclose how this score is derived, however the following factors are known to affect the score:

Payment History: Does the borrower make their payments as agreed? Is there a history of late payments?

Amount owed in relation to total credit available: The lower the percentage of debt balances to the total debt credit line, the better the FICO score.  Interestingly, it may be a benefit not to cancel all of your old credit cards that you don't use, as this shows up as available credit that you are not using. This shows that a person can manage their credit resources responsibly.In addition, these old cards gives you a better score through a longer credit history. You should stay under 33% of your total credit limit. It is generally better to have some amount owed on several cards rather than maxing out one card. This accounts for approx. 30% of your FICO score)

Length of Time with Credit: The longer you have a credit account, the better (This accounts for approx. 15% of your score)

Negative Credit Information: Any negative credit information such as a bankruptcy, credit write-off, or collection account will lower your FICO score. Do you pay your bills on time? (This comprises about 35% of your FICO score).

How many inquiries you have had within the past year (Accounts for approx. 10% of your score).

Other factors include: a) Length of Time at Current Residence: This signifies that the person is stable  b) Employment History; The longer a person has held a job, the better his credit rating, and c) the mix of credit (Optimum is 3 to 5 revolving credit cards, a mortgage, and a auto loan ,as this demonstrates to lenders that you are familiar with the various forms of debt and use them responsibly.( (This accounts for approx. 10% of your score).

In addition to lenders using the FICO score to determine whether or not to grant a loan, the FICO score can also affect the terms of the loan, particularly the interest rate. Generally the lower the FICO score the higher the interest rate, since the lender is accepting greater risk in granting the loan.

The following is a general rule of thumb in evaluating your FICO score:

          Score 700-850    Smooth loan approval process; best interest rates
          Score 550-699    Medium risk to lender; higher interest rates
          Score 300-549    Sorry, no loans or credit cards generally issued

One source for recommendations on improving your FICO score is Myfico.com 

You can request a free copy of your credit reports once a year. If you find an error in your credit report, you should contact the credit agency immediately in writing. The following is contact information:

Equifax: http://www.equifax.com/
Experian: http://www.experian.com/
Trans Union: http://www.transunion.com/index.jsp

At these websites, you can order credit reports that include your FICO score for approx. $30. 

In March 2006, the three major credit agencies announced that they would start providing a new credit score rating service called "VantageScore" in competition with the FICO credit scoring system. The intent of this new system is to provide credit scoring information to lenders and creditors on a more uniform basis. The new scoring system will rate credit on the following basis:

                     Score               Grade                Credit Outlook
                     901-990                A                  Excellent rating, low interest rate
                    801-900                B                  Good rating, but short of excellent
                    701-800                C                  Fair; moderate risk
                    601-699                D                  Higher risk means higher interest rate
                     501-600                F                  Highest risk; may not qualify for loan

Maureen Megowan
Maureen Megowan
Realtor