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All about credit scoring: WHAT IS FICO?

FICO® is a mathematical model created as a tool for lenders to use in evaluating the risk associated with lending you money. FICO® stands for Fair Isaac Company, the company that created the original scoring model. The formula used by Fair Isaac utilizes everything from numerous addresses, alias names, occupation, length of time you have had credit and other factors to come up with your score.  People who have all good credit may score low because all of their credit is fairly new, based on Fair Isaac. Many disagree with the scoring module and for good reason.

The module seems a bit bias and can sometimes make no sense at all. More lenders are relying on desktop underwriting which analyzes your score without really looking at your credit or explanations for past bad credit. You can improve your score but not overnight. Scoring can take time to build and each bureau has their own independent score known as FICO®, Empirica® or Beacon®.

The scores can vary greatly from one bureau to another. Many times people believe they can settle a debt or pay a collection account and their score will go up, sometimes it does go up slightly but other times it can remain unchanged. While some claim it has been fully validated to predict performance odds, slow pays, no pays, and bankruptcies with unprecedented accuracy others tend to believe it is trying to predict elements beyond its control.

While it is true that it can point out future trouble with an individual, so can a human who reviews the credit report. It should not take software to see if someone has the potential to go bad. Lenders are relying to heavily on scoring factors alone. So, we have to live with it and make the best of the scores we get.

Good scores are from 730 and above
620 to 650 is low to fair but can be questionable and require a little tweaking to qualify with some lenders. 690 and over is considered Good. A+ credit is 740 and over.

The highest score is 900

• Close unused newer accounts to increase scoring

• Pay balances down enough so that you are not at or near limit. This affects your DTI, debt to income ratio

• Don't list multiple addresses, phone numbers and employers

• Stop or limit inquires

• Pay all accounts on time

How is FICO® Calculated?
-Payment history 35% of score
-Current credit usage 30% of score
-Length of credit history 15% of score
-Applications for new credit 10% of score
-Total credit types (Mortgage, loans, cars, credit cards etc.) 10% of score

Several factors can have a negative impact on your credit score:
- History of non-payment
-Public record information
-Evidence of collection accounts
-Recent delinquent accounts
-High balances owed on accounts
-Credit cards charged to their limits
-Too many new accounts

Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.

What can I do to improve my score?
Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change -- but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application. Nevertheless, scoring models generally evaluate the following types of information in your credit report:

Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy.

Outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.

How old is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.

Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.

How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score. Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.

What happens if you are denied credit or don't get the terms you want?
If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."

If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time. Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied. If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information in your credit report.

What is calculated into your score:
How long you've lived at your current address
Your financial obligations (Debt-to-income ratio)
Any late payments
The amount of credit you have outstanding
The amount of credit you are using
The amount of time you've had credit established

Some portions courtesy of the Federal Trade Commission
FICO is a registered trade mark of Fair Isaac Company.