What Is FICO?

Fair Isaac Corporation is an American company that was started by engineer Bill Fair and mathematician Earl Isaac. FICO is a registered trademark of Fair Isaac Corp. The FICO score is a credit rating method used to calculate credit risk. The FICO scoring system is used by Equifax, TransUnion and Experian. It’s only a measurement of credit risk, just like Celsius is a measurement of temperature.

In the FICO scoring system, the lowest possible score is 300 and 850 is the highest.  North American consumers generally fall in the 720 to 730 range. FICO doesn’t disclose the method of determining scores, though the following is a basic concept of where your score comes from:

•             Aproximately 35% of this credit score originates from your payment history. This is greater than any other single element and that’s why you should constantly pay by the due date. All lenders will report past due payments at 60 days however many will report whenever a payment is just 30 days past due.

•             Debt-to-credit-limit ratio counts for about 30% of the credit score. To maintain a good credit rating, many experts agree that you must never use over fifty percent of your limit, although trying to keep it less than 30% is better yet. For instance, when you’ve got a total borrowing limit of 10,000 on all your current credit cards, you shouldn’t allow your debt to go over 5,000, while keeping it less than 3,000 will probably boost your rating even more.

•             Credit history accounts for around 15% of the score. The more time you have credit accounts, the greater your score. The one and only thing that can influence this issue is time.

•             Another 10% of the score is based on the kinds of credit accounts on your record. Taking care of several different credit debts like revolving credit (a credit card), a car loan and a home loan will certainly increase your rating.

•             The final 10% is determined by how many recent credit checks. Many credit checks whithin a short time can decrease your score. When you know you will be applying for credit soon (car loan, mortgage) you should avoid applying for any other credit for a few months prior.

A few of the elements which impact the score may seem like they do not make much sense, however it is all dependant on statistics. It is a bit like auto insurance; reduced risk means reduced rates. For instance, teenage boys pay much more for auto insurance because they tend to be much more likely to file claims as compared to older women. In the same way, a person who, say, maintains a higher balance or applies for several lines of credit is much more likely to fall behind on their payments than a person who maintains a lower balance and has not requested credit recently.

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