By Julie Macc, Certified Credit and Identity Theft Specialist
What is Fico?
FICO is an acronym for the Fair Isaac Corporation the creators of the FICO score.
The FICO scoring system is used in the United States for extending or offering credit, employment credit checks, landlords, and in States that legally allow it, insurance rates.
How is a score made?
The FICO score is computer generated using mathematical models. The score takes into account various factors in five different areas to determine credit risk: payment history, current level of indebtness, types of credit used, lenght of credit history, and new credit.
People that have a FICO score will range between 300-850.
Not everyone has a Credit Score. In order to have a credit score, your credit file has to meet certain minimum standards. Failure to meet the below guidelines with any of the 3 bureaus, Equifax, Trans Union and Experian means you do not have enough information to generate a score and you will see a zero in place of a score.
Minimum Criteria Needed to Generate a Credit Score:
A credit score of 0 can happen in one of three ways:
- SS# is reported as deceased to the credit bureaus
- There hasn’t been an account open for at least 6 months
- No trade line has been updated in the past 6 months.
Ironically, I have seen reports that have no open trade lines but just collections and judgments that have a FICO score!
I have also seen reports after a Chapter7 Bankruptcy has discharged with a high 600’s score!
Before 2002 consumers could not even get their own FICO score.
Credit Scores were a closely guarded secret and the only way to access them was through a lender who ran both your credit report and score. Only after tremendous outcry over consumer rights in credit were consumers allowed to purchase their scores.
Consumer’s rights give you one free report per year from the credit bureaus at www.AnnualCreditReport.com. This only provides you with your credit report not your credit score, which you will have to pay for. There are also many “free” sites such as Credit Karma or many of the credit card companies are now offering “free” reports. Please be aware that the scores that you obtain online are not your true scores!
Credit Karma also offers a free report online from 2 of the bureaus, Equifax and Trans Union.
The “Free” annual credit or an online credit report is weighed differently than a lender’s credit report, and does not contain the same data that a lender report does. From a lender’s perspective, there are custom reports where different factors weigh differently.
A mortgage lender can and will customize the FICO scoring model based on their requirements. I have seen lenders reports ran by different lenders on the same day vary from 10-20 points.
An automotive lender will get an automotive based score. More weight is put on your auto credit and how you have paid on previous auto loans than anything other account contained in your credit report.
A credit card company is going to be more concerned with how timely you are with your credit card payments to decide if they will offer you credit or allow a credit limit increase on an existing line of credit.
Multiple auto inquiries or mortgage inquiries will not impact your credit score if they are done in a certain time frame. The scoring model knows that many people will visit several dealerships and often have credit run, so when car shopping you are allowedto have your credit pulled multiple times in a 30 day period and it only counts as 1 inquiry. The allowance for mortgage credit is slightly longer, 45 days, and it also counts as 1 inquiry. These credit inquiries are considered “hard” inquiries.
When you sign up online for a service and are running your own credit it is considered a “soft” inquiry and will not affect your score no matter how many times you check it.
What does the credit score mean?
- Predicts the statistical chance of a consumer being late 90 days or more on a loan or credit card
- Each score is specific for each bureau
- The higher the score the less the odds of default
- The score is generated by analyzing the information contained in the consumer’s credit report at THAT POINT IN TIME.
Credit Score Components:
- Past Delinquencies 35%
- Debt Ratio 30%
- Average Age of File 15%
- Mix of Credit 10%
- Inquiries 10%
Refer to any late payments or collections. It is very important to address any negative reporting as soon as it is reported to any credit bureau. If you were not 30 days late, or you do not recognize the collection company, you should write to each consumer credit bureau reporting the item as soon as possible.
Being close to, or exceeding, the credit limit on any revolving accounts such as a credit card or line of credit can have a negative impact on your score. Mortgage or auto loans are considered Installment Loans, and there is no negative effect for being close to the original loan amount when the loan is first opened. Student loans can also have a negative effect if the interest is “deferred” and the interest accrued is being attached and reported and puts you over the original credit limit.
Average Age of File
The credit scoring models reward consumers for an account that has been open for a long period of time and has no recent late payments. When you open a new account it takes the scoring system 6 months to “season”, or score, your payment history. Closing accounts also deducts points and will lower your score by taking away available credit limits.
Mix of Credit
Some types of credit cards score higher than others. AMEX or MASTERCARD will score higher than a department card due to many department stores has a lower approval standard and have an in house lending program. The best scoring model for a consumer score would consist of the following on a report: auto loan, mortgage, revolving credit card, all 6 months or older.
There are 2 types of inquiries: The “hard” inquiry, when a potential lender orders a credit report to see if a consumer fits the criteria of their underwriting division for a loan or line of credit, and the “soft” inquiry. A soft inquiry is made when a consumer receives credit offering, such as a credit card solicitation offer, without having applied, OR when a consumer pulls their own report. Hard inquiries can start to deduct points; soft inquiries made by a consumer viewing their own report will not have any negative effect on the credit score no matter how often a consumer reviews their own report.