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What Is A FICO Score?

by: Sahil | last updated: November 23, 2009
Tags: FICO score, credit score, credit, fair isaac, credit report, credit rating, FICO

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What Is A FICO Score?

The FICO score is a model for calculating your credit score which was developed by Fair Isaac Corporation. The FICO score model is one among the numerous other models which are used by lenders; some of them being NextGen, VantageScore, and the CE Score. However, the most popular model for calculating your credit score is the FICO model. FICO scores are the most used credit scores in the world and by all the three major credit bureaus, Experian, TransUnion, and Equifax.

FICO is a public corporation that is the most widely used model in the United States and is calculated statistically. However, there are other models that mimic the FICO scoring technique and are cheaper to acquire compared to FICO generated scores. Such models include the TransUnions TransRisk New Account, Experians ScoreX, and PLUS scores. The FICO scores are calculated by taking into consideration many factors such as the payment history, credit utilization, length of credit history, types of credit and hard inquiries.

The weighted contribution of all the factors mentioned above is different; some carry significant importance in calculation of your FICO score and some carry lesser importance. The most important factors are the payment history and credit utilization of a person. Both these factors are weighted at almost 35% each in calculation of your credit score. The payment history of a person includes all the financial obligations of a person such as credit card payments, mortgage payments, or payments for any other loan. Credit utilization is the ratio of the balance (money owed) or revolving credit to the complete amount of credit that is available.

Other factors affecting your FICO score are types of credit, length of credit history, and hard inquiries. The FICO score will be higher if you have a long credit history with a credit card company or any other financial institution. An older credit card is much more useful for improving your FICO scores compared to a newer one. Paying off the balance on an older credit card without fail will ensure a healthy credit score in the future.

Hard inquiries will affect your credit score only if they are persistent and spread over a long period of time. A string of inquiries by lenders about your FICO score within a period of fourteen days is usually considered as one inquiry by the credit bureaus. Therefore it does not affect your FICO score dramatically if the inquiries are not spread over a long time.

The types of credit available also affect the FICO score of a person and credit cards have a major impact on the same. The payment history of all the credit cards and the ratio of balance and the available credit are some of the important factors which are considered when calculating the FICO score. Having no credit cards or no mortgage will paradoxically have a negative impact on your FICO score. Conversely, having two to four credit cards with a good history of payments will help in improving your credit score.

Some other smaller factors that affect your FICO score are money owed because of a tax lien or a court judgment and any consumer finance credit accounts. Consumer finance credit accounts usually implicate a poor credit history because these are made for sub-prime lending purposes. Consumer finance credit is more prevalent in the United States compared to other countries and may have a negative impact on your FICO score.