What the FICO? A Quick Look Inside Your Credit Score…

While most everyone knows they have a credit score that creditors use as the end-all and be-all of a consumer’s financial responsibility, I would bet just as many don’t know who – and especially how – their magical three number credit score is determined.

Well, we can all thank Fair Isaac & Co.  for coming up the FICO score (or credit rating) that roughly 90% of U.S. banks use to judge our worthiness.  And if one wasn’t enough, we have three scores, one from each of the major credit reporting agencies.  Our scores come from information the credit bureaus keep on file about us and change over time.  While this score isn’t an exclusive indicator of whether or not we’ll be approved for a loan or get a credit card, it’s as close as you’ll get.

So how do they do it?  Each credit bureau has their own formula and lenders are not required to use any specific calculation, but here are the basics of how our score is determined:

1. Payment History – About 35% of your score comes from payment information on your accounts, whether paid in full dutifully every month or 6 months delinquent.
2. Amounts Owed – About 30% comes from amounts owed on your accounts, what kind of accounts they are and how many carry balances.
3. Length of Credit History – About 15% comes from how long an account has been open and when it was last used.
4. New Credit – About 10% comes from the number of new accounts opened and the number of new inquiries into your credit report.
5. Types of Credit Used – Finally, another 10% looks at the types of accounts you have (credit card, retail account, mortgage etc.) and the prevalence of information on each.

Hopefully this brief look will help the next time you’re wondering why three numbers can be your best friend or worst enemy.

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