Factors That Affect Your FICO Score
If you’ve ever been in the market for any type of loan (besides one from your rich uncle, but even he may want to pull your credit), including a home mortgage, a car loan, student loans, credit cards…the list goes on, you’ve likely heard the phrase “FICO score” passed around. In fact, FICO score is often used as a synonym for “credit score”. A FICO score is one type of credit score. It is the most commonly used score for assessing creditworthiness of applications for mortgages, car loans, and other types of debt financing.
Fair Isaac Corporation
The term FICO comes from the Fair Isaac Corporation, the name of the data analytics company (later changed to FICO) created by Bill Fair and Earl Isaac in 1956 as a credit scoring service. FICO scores are requested (for a fee) by lenders over 10 billion times per year. Needless to say, they are in high demand in a society that uses a lot of credit.
FICO Score Range and Thresholds
FICO scores range from 300 to 850. This range of scores is normally broken down into the following more general ratings for ease of classification by lenders:
300-550 – Bad Credit
551 – 649 – Poor Credit
650 – 699 – Fair Credit
700 – 749 – Good Credit
750 – 850 – Excellent Credit
What Are FICO Scores Used For?
When an application is made for a loan, whether it be a mortgage, a car loan, a student loan, credit cards, and other types of debt, lenders pull a credit report. More often than not, that credit report uses the FICO score to make determinations about a particular person’s creditworthiness.
People who are disciplined enough with their finances (pay bills on time, use credit wisely) to have scores that fall into the top two categories (good and excellent credit) usually find that they have much more access to financing opportunities and better terms (e.g. lower interest rates) than those who fall below into the bottom three categories. For those who have bad credit, denials for mortgages, home loans, and credit cards abound.
For example, when applying for an FHA-backed mortgage loan, if your credit score is less than 580, you are required to have a down payment of at least 10% of the purchase price of the home you’re buying. If your FICO score is less than 500, you don’t qualify for an FHA loan. On the other hand, if your score is 580 or above, you can be granted an FHA loan with only a 3.5% down payment. You can see that credit scores within 80 points of each other (in the middle of the spectrum in this case) lead to very different opportunities and outcomes.
In recent years, credit scores have been used by potential employers to look for signs of risk. If you’re on the bubble for a new job, your credit score could help you get the job or could send a troubling signal to the potential employer that could cost you the opportunity.
FICO Score Scoring Factors
These are the factors that influence your overall FICO score. I’ll explain more of the details of what’s involved with each one of them in the next section.
- payment history
- level of indebtedness
- length of credit history
- types of credit used
- recently performed credit requests
Payment History
The payment history element of a FICO score makes up 35% of the overall score. A person’s payment history is affected negatively when reports are made of late payments, liens, foreclosures, bankruptcies, and other indicators of financial irresponsibility. The lack of such information on the payment history section of a FICO score will cause the score to go up.
Level of Debt Burden
A person’s level of indebtedness contributes 30% to his overall FICO score. This portion of the FICO score is affected by six different metrics:
- Debt to limit ratio
- Number of accounts with balances
- Total amount owed across all debts
- Amount that has been paid on installment loans (loans paid back through regular payments applied towards principal and interest)
Length of Credit History
This aspect of your credit history contributes 15% to your overall FICO score. The longer you’ve had credit and have stayed current on those credit lines, the higher your score will be.
Young adults are obviously negatively impacted by this element of the FICO score, as their credit history is naturally short. Credit history cannot begin to accrue until a person becomes an adult at 18 years old. To help with this, some financial advisors recommend that kids to graduate to adult status become authorized users on established credit accounts (which allows them to “borrow” some from the established credit of the account itself) or to apply for their own credit card, even if they only qualify for a low credit limit.
Types of Outstanding Credit
Credit is organized into four different categories:
- installment
- consumer finance
- mortgage
- revolving
Having various types of credit reported on your credit report will affect your FICO score. This element of FICO is worth 10% of the score.
Having more than one credit account (and being current on the various accounts) open helps your score move higher. If you only have one type of outstanding credit, your score is likely not going be as high.
Frequency of Recent Credit Requests
Frequent requests (often referred to as hard pulls, meaning you applied for a loan of some type) are seen by FICO as a negative sign. This factor contributes 10% to your overall FICO score. Limiting the number of “hard pulls” (“soft pulls” are okay, and are usually done without actually applying for any type of loan, sometimes even without your knowledge a report is being pulled) will help you keep your FICO score healthy.
If your credit report is requested too frequently, it is a sign of risk to the credit reporting agencies who calculate your FICO score. It is recommended that you not apply for credit more often than once in each six month period.
How Data Is Reported to FICO
Credit reporting is done through three major credit bureaus in the United States: TransUnion, Experian, and Equifax. Larger businesses (those who have separate consumer client accounts numbering 100 or more ) typically establish reporting channels with one or more of these credit reporting agencies, then regularly report their interactions with
Reporting of credit activities resolves to a person’s social security number, which is why that information is typically used (often along with your address) to request a FICO score or other credit report.
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