Facts About Your FICO (Credit Score)

Millions of Americans are plagued with poor credit scores. Bad credit scores can pose multiple obstacles for the average consumer, due to the hassle brought forth by a looming, low number. Applying for a credit or borrowing money from a lender is an arduous, at times impossible, task.

“FICO” stands for Fair Isaac Corporation, which is the company that created the industry standard credit scores used by most lenders. It is a number generated by a mathematical algorithm that’s based on information in your credit report, compared to information on tens of millions of other people. The resulting number is a highly accurate prediction of how likely you are to pay your bills.

What’s in my FICO Score / How is my FICO Score calculated?

The FICO® Score is calculated from data in your credit report. This data is grouped into five categories. The percentages reflect how bearing each area has on how your FICO Score is calculated. Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score.

Your FICO credit score is calculated based on the following:

1. Payment history (35%)
The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO® Score.

2. Amounts owed (30%)
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO® Score.

3. Length of credit history (15%)
In general, a longer credit history will increase your FICO® Score. However, even people who haven’t been using credit long may have a high FICO Score, depending on how the rest of the credit report looks.

4. Types of credit in use (10%)
The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

5. New credit (10%)
Research shows that opening several credit accounts in a short period of time represents a greater risk, especially for people who don’t have a long credit history.

Your FICO Score takes into account how long your credit accounts have been established, along with the age of your oldest account, the age of your newest account and an average age of all your accounts. It factors in how long specific credit accounts have been established, as well as how long it has been since you used certain accounts. The scale runs from 300 to 850, and the vast majority of people will have scores between 600 and 800. A score of 720 or higher will get you the best interest rates from lenders.

The American Public’s Credit Scores

Credit Score	Percentage
499 and below	2%
500-549	5%
550-599	8%
600-649	12%
650-699	15%
700-749	18%
750-799	27%
800 and above	13%

Currently, each of the three major credit bureaus uses their own version of the FICO scoring method — Equifax has the BEACON score, Experian has the Experian/Fair Isaac Risk Model and TransUnion has the EMPIRICA score.

Your FICO Score only looks at information in your credit report.

Your credit score is calculated from your credit report, but lenders look at many things when making a credit decision including your income such as how long you have worked at your present job and the kind of credit you are requesting. The following are not considered in a FICO Score:

• age
• race
• sex
• job or length of employment at your job
• income
• education
• marital status
• whether you’ve been turned down for credit
• length of time at your current address
• whether you own a home or rent
• any information that is not contained in your credit report

A lender may consider all those factors when deciding whether to approve a loan application, but they aren’t part of how a FICO score is calculated. Since lenders can also use their own scoring methods, nothing is guaranteed, but you certainly can’t hurt your score by taking any of these steps.

• Review your credit report and correct any errors you find.
• Keep old credit accounts, even if you’re not using them.
• Reduce your balances on credit cards to 75 percent or less of your available credit (25% is optimal)
• Pay your bills on time.
• Don’t let anyone make an inquiry on your credit report unless you absolutely have to.

If you are planning on applying for a large loan such as a mortgage, do not open new credit card accounts just to increase your available credit to raise your score. Opening new accounts will have a negative impact at first, but can help boost your FICO score in the long-term.

The Effect of Your FICO Score

If you have ever rented an apartment, bought cell phone service, applied for a job that involved handling a lot of money, or had utilities connected, your credit score has probably been pulled.

The difference in the interest rates offered to a person with a score of 520 and a person with a 720 score is 4.36%.

On a $100,000, 30-year mortgage, that difference would cost more than $110,325 in extra interest. Your monthly payment would be about $307 higher than it needs to be, in order to offset the lender’s “risk”. This chart shows an example of how interest rates for a car loan can vary based on your credit score:

FICO® Score

	FICO® Score
Auto Loans	500-589	590-624	625-659	660-689	690-719	720-850
36-month new auto loan	18.597	16.206	12.225	9.498	7.386	6.674
48-month new auto loan	18.598	16.206	12.226	9.500	7.390	6.678
Source: myFICO.com

As highlighted in the following infographic, late payments and other poor financial decisions can lower one’s credit score. A poor credit score can lead to innumerable obstacles, from loan approval troubles to higher interest rates. On the contrary, a high credit score can can give way to many financial, advantageous benefits. For tips on how to get your credit back in shape, visit http://ift.tt/ZWBAcX to compare and review various credit repair companies. See how you can jumpstart your credit score, and change your financial standings from limited to limitless.

This article by Anna Rosen first appeared on Top 10 Credit Repair and was distributed by the Personal Finance Syndication Network.