What is a FICO Score?

FICO is an abbreviation for the Fair Isaac Corporation, the first company to offer a credit-risk model with a score. It was founded in 1956. Kinda makes you think of a wise old economist or university professor named Fair Isaac, but no, it was named after two guys, Bill Fair and Earl Isaac…an engineer and a mathematician.

To create credit scores, FICO uses information provided by one of the three major credit reporting agencies — Equifax, Experian or TransUnion. But FICO itself is not a credit reporting agency.

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A FICO Score is a three-digit number, between 300 and 850 determined by the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how long the term of the loan is, and how much it will cost (the interest rate and points).

You can think of a FICO Score as a summary of your credit report. 

Fact: Not all credit scores are ‘FICO’ scores, but 90% of lenders use FICO, so it matters the most.

Why do I feel like I can’t easily impact my score?  

It’s not JUST how often you’ve been late or how much you owe on loans and credit cards. There’s an actual algorithm involved.  This is part of what’s so frustrating to people trying to improve their credit!

What goes into a score?

Five main factors go into FICO scores, and they each have a different effect on your score, and they don’t have equal weight.  Here’s the breakdown:

FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

Payment history (35%)

The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This helps a lender figure out the amount of risk it will take on when extending credit. This is the most important factor in a FICO Score.

(Be sure to keep your accounts in good standing to build a healthy history.)

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. However, if you are using a lot of your available credit, this may indicate that you are overextended—and banks can interpret this to mean that you are at a higher risk of defaulting.

Length of credit history (15%)

In general, a longer credit history will increase your FICO Scores.However, even people who haven’t been using credit for long may have high FICO Scores, depending on how the rest of their credit report looks.

Your FICO Scores take into account:

  • How long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
  • How long specific credit accounts have been established
  • How long it has been since you used certain accounts

Credit mix (10%)

FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. You don’t have to have one of each, but an abundance of unused credit cards can actually work against you.

New credit (10%)

Research shows that opening several credit accounts in a short amount of time represents a greater risk—especially for people who don’t have a long credit history. If you can avoid it, try not to open too many accounts all at the same time.

NOTE: This is a common issue buyers create for themselves when they’re in contract or pending. They go get new credit at furniture stores, buy a new car or boat, Home Depot card, etc. Then when the underwriter checks credit 2 days before closing, it’s changed…and usually gone down.  Advise your clients to leave their credit alone til after they close!!

FICO® Scores consider a wide range of information on your credit report. However, they do not consider:

  • Your age
  • Occupation
  • If you’re in a credit repair plan
  • Race
  • Area you live
  • Child support obligations
  • Salary
  • Rates being charged on existing credit

Your scores do not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. 

They also do not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them.

Requests that are marked as coming from employers are not counted either.

So How do I FIX My Score? How to improve it?!

There is no ‘magic easy button solution’ to this.  The best way to improve it is to manage it over time and be intentional about it, but here are some methods:

Steps to improve your FICO Score

  •  Check your credit report for errors. Carefully review your credit report from all three credit reporting agencies for any incorrect information. Dispute inaccurate or missing information by contacting the credit reporting agency and your lender. Read more about disputing errors on your credit report.
    Remember: checking your own credit report or FICO Score has no impact on your credit score.
  • Pay bills on time. Making payments on time to your lenders and creditors is one of the biggest contributing factors to your credit scores—making up 35% of a FICO Score calculation. Past problems like missed or late payments are not easily fixed.
    • Pay your bills on time: delinquent payments, even if only a few days late, and collections can have a significantly negative impact on your FICO Scores. Use payment reminders through your banks’ online portals if they offer the option. Consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account.
    • If you have missed payments, get current and stay current: poor credit performance won’t haunt you forever. The longer you pay your bills on time after being late, the more your FICO Scores should increase. The impact of past credit problems on your FICO Scores fades as time passes and as recent good payment patterns show up on your credit report.
    • Be aware that paying off a collection account will not remove it from your credit report: it will stay on your report for seven years.
    • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor: this won’t rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. Seeking assistance from a credit counseling service will not hurt your FICO Scores.
  •  Reduce the amount of debt you owe your credit utilization, or the balance of your debt to available credit, contributes 30% to a FICO Score’s calculation. It can be easier to clean up than payment history, but it requires financial discipline and understanding the tips below.
    • Keep balances low on credit cards and other revolving credit: high outstanding debt can negatively affect a credit score.
    • Pay off debt rather than moving it around: the most effective way to improve your credit scores in this area is by paying down your revolving (credit card) debt. In fact, owing the same amount but having fewer open accounts may lower your scores. Come up with a payment plan that puts most of your payment budget towards the highest interest cards first, while maintaining minimum payments on your other accounts.
    • Don’t close unused credit cards as a short-term strategy to raise your scores.
    • Don’t open several new credit cards you don’t need to increase your available credit: this approach could backfire and actually lower your credit scores.

HOMEWORK:

1 .    Get your own credit report. Remember you don’t get a point reduction for asking for your own report or score.

2.     Review it for accuracy and follow the steps on each of the 3 reporting agency’s sites to contest misinformation.

3.     Consider creating a 1-page ‘how to fix your credit’ based on today’s podcast for your buyers who get turned down for a mortgage or who can’t qualify high enough for it to make sense buying.

4.     Be certain to coach your buyer clients to not mess around with new credit until they have closed!

Also read: Record High Average FICO Scores