What is a FICO score?
FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States. An individual’s credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan. FICO scores are generally used for obtaining mortgages, car loans or consumer credit. The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion. Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula. FICO scores range from 300 – 850, with higher scores being considered less risky. For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent. Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing.
The factors that contribute to a FICO score and the weighted percentages for each are as follows:
- 35% — timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
- 30% — the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
- 15% — length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
- 10% — types of credit used (installment, revolving, mortgage)
- 10% — recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)