What is a fico score…and more about it!

| May 27, 2013
Fico score

Fico score

You are always trying to maintain good credit scores by paying bills on time. But ever thought; why it is done and what is a fico score? Getting the in-depth understanding would surely help in maintaining a decent credit score. For applying for house loan or property mortgage you would require filing of FICO score and this when you need it the most. You can always seek the authorised credit score agencies to collect your credit scores before getting the FICO details. But, before that you would like to know – what is a fico score and more about it?

Intro to FICO

“FICO” stands for Fair Isaac Corporation. It is registered company which is responsible for creating industry standards credit scores which are used by the money lenders. FICO was introduced in the 1950s and since then it has become one of the standards and most commonly practiced methods of credit calculations. By mid 1980s it gained more popularity and was considered the most accredited method of computations.

More on ‘what is a fico score’

‘FICO score’ is the numeric representation of your credit reports which includes – payment of credit card bills, loan amounts and mortgages. The cumulated details are sent to the lenders on the basis of which the credit reports are prepared after reviewing the application. You’re high FICO scores means you have maintained good credit scores and have lower risk. But if, the FICO scores are lower than you would be expected to improve it. You would be declined of more credits or would have to pay more interest rates.

On knowing ‘what is a fico score’ you could compare it with the standards. The highest FICO score you can achieve is 850 and the lowest is 300. Usually it is very rare to maintain a credit score above 800 and therefore, anything between 500 – 800 is considered normal and anything beyond 750 is excellent. Other than FICO scores also there are different types of credit ratings which are not commonly used by the lenders.

Calculating the FICO score

The FICO scores are computed on the basis of several factors which are present in the credit data sheet. The details are categorised in five groups –

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Types of credit used

Each category plays certain importance level in the entire group. When you identify ‘what is a fico score’ and try computing then these percentages of importance are imperative. Remember that you’re FICO score is concerned with both positive and negative factors. From late payments to more loan amounts and then repayment within time limit – all factors are considered while calculating.

Factors affecting FICO score

Payment history is the foremost category and is also the most important one. It holds 35% of the total credit score sheet. Followed by Amount owed, which is total money owed by the lenders in your name. It builds the 30% of the total FICO score. Length of credit history succeeded by amount owed is the category level 3 with is of 15% significance. Lastly, New credit and Types of credit used are each at 10% range and plays equal importance in building the credit scores.

On reviewing your credit details then the foremost things the lenders would want to know is about the paid past credit account details. The overall good scores are given importance and therefore, a few late payments would not put you in trouble. There is various account types considered for calculating the payment history –

  • Credit cards (Visa, MasterCard, American Express, Discover card)
  • Retail accounts (credit from the departmental store and shop credit cards)
  • Instalment loans (equal term payment loans on car and house)
  • Financial company accounts
  • Mortgage loans

On borrowing money does not mean it would affect the FICO scores drastically. Although, when large share of your credit is used and has exceeded the extended period then it is alarming. There are several aspects which need analysis before drawing conclusion about the amount owed for knowing what is a fico score. This includes – amount owed in all the various accounts, declaration of the different types of accounts, balance amount in the respective accounts, instalment loan amount in comparison is the original loan balance.

For computing the length of credit history you should consider factors like – term of the credit accounts, your usage of the credit accounts and age of the oldest account in comparison to the age of the newest one by deciding the average age of all the credit accounts you hold.

The mix of different types of credits used builds the 10% of the FICO scores and consists of credit cards, retail accounts, instalment amount, financial company accounts and mortgages. Managing the plastic money would create lot of difference in the credit scores.

But, another fact is that people with no credit cards have had poor scores then people having cards and managing it smartly. Purchasing from credit cards and making the payment on time is one the best indicators of boosting the credit scores. However, closing the credit accounts in order to escape from poor scores would do no help to it.

Managing the new credit limit is the tricky one as it also determines 10% of the credit FICO scores. Ensure that you do not open too many credit accounts as it might reflect negligence of credit history. You keep a tab on scores by checking it with the credit reporting agency or any authorised agency.

FICO score varies

Remember that the FICO score also depends on person to person. For some the length of credit history or the types of credit used might be preceding over the amount owed. In such cases the calculation is same but, the percentage of importance giving to each category would differ. The entire computation here is general perspective indicating the method of FICO score computation on broader view point. The rules are same but the method of calculation differs from person to people.

What is a fico score…and more about it!

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