by: Gary Gresham
FICO scoring originated from the Fair Isaac Company. The Fair Isaac Company invented the current credit scoring system that turns all of your credit information into a personal credit score. Today lenders still use this credit scoring system to determine credit risk.
The term FICO scoring means, a credit score based on the Fair, Isaac Company or FICO model. It's important to know your current credit or FICO score and it's also important to have an understanding of how FICO score is determined.
FICO scoring is used by lenders to figure out what your interest rate will be on loans you apply for. If you're buying a house the types of mortgages available to you are based on your personal credit score.
That score is based on the FICO model and the interest you pay, as well as your monthly payment, is based on what your personal credit score number is.
The same is true when you get a car loan, as well as the premium on your car insurance or homeowners insurance. Your personal credit score can even affect your chances of getting new employment.
FICO scoring is calculated from a multitude of different credit data and it is grouped into five different categories.
So that you will understand the basics of how FICO score is determined, the percentages below reflect how important each of the categories are in determining your personal credit score.
Payment history (35%)
Your payment history is the largest factor in determining FICO scoring. This includes the number of unpaid bills you have, any bills sent to collection, bankruptcies etc. The more recent the problem, the lower your score.
Outstanding Debt (30%)
How much of the total credit line is being used on credit cards and other revolving charges? High balances or more precisely, balances that are close to your credit limit can negatively affect your credit score. Most lenders think 40%-60% of maximum is ideal.
Length of your credit history (15%)
How long have your accounts been open? High loan amounts that you have paid as agreed and have had open a long time work best. Closing old accounts can have a negative affect because it makes your credit history appear shorter.
Recent inquiries (10%)
Every time you apply for any kind of credit you create an inquiry on your credit report. A lot of inquiries negatively affect your credit score. However, ordering a copy and checking your own credit report or personal credit score counts as a soft inquiry and does not go against your score.
Types of credit in use (10%).
How much is still owed on current mortgage loans, credit cards and finance companies compared with the original loan amounts? Also it's important not to open a number of new credit card accounts just to increase your available credit. It will have the opposite affect and lower your score.
FICO scoring is based on all the categories of information, not just one or two. Lenders on the other hand will look at a lot of things when they make a credit decision. Your income, how long you have worked at your present job and the kind of credit you are requesting will always be a factor.
There are many things that will affect your financial future and FICO scoring plays a big role in how successful your future will be.
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