FICO Determination

There always seems to be a lot of questions concerning credit scoring and how an individual's credit score is determined.  Eventhough the credit scoring model is a factor system and each time a credit report is run the scoring model kicks out a different yet similar score, it is basically calculated like this:

FICO score predicts the likelihood that a borrower will have a 90-day late on any trade line over the next 24-month period.  Fico scores range from 300-850 but can vary per depository.   Fico score determining factors:

35% Payment History

• The primary determinants regarding payment history are recentcy, frequency, and severity.

30% Balances

• The cumulative balances on all open revolving trade lines is divided by the cumulative high credit limits for all open revolving trade lines. It is ideal to be well below 50%. Scores are severely damaged when the cumulative balances are above 75% of the cumulative high credit limits.

• The next layer after the cumulative analysis is the individual revolving account analysis. Basically, the cumulative carries more weight but one revolving account that is over 50-75% of the high credit limit will hurt scores.

• When high credit limits on revolving accounts are high (approx $30,000) they are treated as an installment loan. The intention of this was to treat revolving heloc accounts as installment loans but the FICO formula treats all revolving accounts with high credit limits as an installment account.

• Closing revolving accounts with a $0 balance can actually have a negative impact your credit. By keeping revolving accounts with low balances open, the borrower actually helps keep the revolving balance to high credit limit ratio lower.

• AMEX uses the highest balance in the past 18 months as the high credit limit. AMEX accounts can hurt the score since that card typically reflects a high balance to credit limit ratio.

15% Credit History

• This section refers to the amount of time that a borrower has maintained established credit. 30 years is considered a good length.

10% Type of Credit

• This section counts all accounts (opened and closed).

• Finance companies can have a negative impact on scores (furniture companies, $0 interest for 12 months type financing).

10% Inquiries

• Inquiries from the past 12 months are the only ones that are considered

• 5-7 inquiries in a 12 month period is generally considered ok

• 30 day mortgage lates carry the same severity as a 30 day revolving late. Fannie Mae and Freddie Mac guidelines is the source that frowns upon mortgage lates.

• 5-15 points can be lost per excessive inquiry.

• Promotional inquiries do not count against score

• Mortgage and Auto industry work the same. All inquiries for these industries within a 30 day period count as 1 inquiry.

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Robert English is a Licensed Mortgage Broker with Texas Mortgage Concepts in the Austin, Texas area.  Robert English (512) 678-4040 / http://www.movingpuzzle.com/