As promised from last week this will be a 2-part blog about the all-important FICO score and what you should know about it. So let’s get started!
So when you hear people through around the term “credit score” loosely, you should know that 9 out of 10 times, they are talking about your FICO score. This is the number that informs all the borrowing or credit purchasing you do in your life. It tells banks what interest rate to give you on car loans, mortgages and credit cards and it sometimes tells apartment managers when or not they’ll approve your application.
FICO stands for the Faire Isaacs Corporation, which is a company entirely created for credit scoring. When credit purchasing started taking off after World War II, there was no organization that was able to assemble all the purchasing information of consumers to help retailers determine who should be able to buy easily and who was a riskier consumer. Bill Fair and Earl Isaac started their company in 1956 and their scoring system went into effect two years later.
Your FICO score is made up of 5 components: Payment History (35%), Credit Utilization (30%), Length of Credit History (15%), Types of Credit Used (10%), and Recent Searches for Credit (10%).
Very briefly, your payment history is how often you have paid your bills on time. Credit Utilization is a calculation of how much credit is available to you through your credit cards or other forms of revolving debt and how much you are actually using. So say you have 2 credit cards, both of which have a $1000 limit and you have $250 on one and $300 on another your credit utilization is $550/$2000 or 27.5%. The lower this percentage the better. But FICO is tricky because if you apply for an receive a credit limit increase, your score could go down temporarily.
Moving on…Length of Credit History is literally how long you’ve been paying bills in your own name. I recently had a client check out her FICO score. She came to me and said that they couldn’t generate one for her because she didn’t meet the minimum scoring criteria. She had only recently gotten her first credit card so it makes sense that there wasn’t enough history yet to judge her on and therefore generate a score. So obviously, the longer you’ve been spending the better this portion is going to look.
Types of Credit Used is literally just that. Is all your credit being judged by credit cards? Do you no own any credit cards and your utility bill is all FICO has to go off of? That’s going to hurt your score. I heard on Marketplace Money about a man who only had credit cards and it was actually suggested to him that he buy a car to bring up his score if what he was after was a higher score. He ultimately decided not to since he wasn’t planning on doing something like buying a car anytime soon.
And finally Recent Searches for Credit. Did you recently apply for a bunch of new credit cards? This will count against you. As will banks checking on your score if you spread them out over a huge length of time. FICO will forgive scores by banks for the purposes of buying a mortgage if they are all done within 90 days of the first check.
So that concludes part one. For part two we’ll discuss how much of an impact your FICO score can have, where you can get it, and what you can do to improve it.