History: Fair, Isaac and Co. (FICO)is a San Rafael, California Company founded in 1956 by Bill Fair and Earl Isaac. They pioneered the field of credit scoring for financial companies. Every credit agency, and most lenders, calculates your credit score using software from FICO (Beacon) or in-house software based on the FICO rating system.



What does your credit score mean? This rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between 300 and 850. Usually a lender will use a combination of your credit score with other factors when determining your risk. The score places the borrower in one of three main categories: Prime, sub-prime, and shafted.

Prime: If your credit score is above 680, you are considered a "prime borrower" and will have no problem getting a good interest rate on your home loan, car loan, or credit card.

Sub-prime: If your credit score is below 680, you are "sub prime", and will likely pay a much higher interest rate on your loan.

Shafted: Below 560 is the shafted score. You may still get a credit card but you will likely be hit with a security deposit or high acquisition fees. Also, your interest rate will likely be between 15 and 23%. At this score, you can forget about most home loans and the majority of new car loans. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates and it may prevent you from getting a job with many companies.

How do your scores get calculated? Each credit agency may calculate your FICO score by different methods. Your score from a credit agency does not come directly from FICO. Each agency has its own twists and name. "Beacon" is used by Equifax, "Empirica" is used by Trans-Union, and "Experian/Fair Isaac" is used by Experian. Instead of FICO scores these scores may be referred to as "Bureau Scores."

Every time your report changes your score will also change because agency data determines your score. The calculation of your score takes into account many categories of information. No one single piece of information or factor makes up your score. As the information in your credit report changes the importance of one or more factors may change in your FICO score. Lenders look at many things when deciding on credit. These things include your income and the kind of credit you are seeking. These items are not reflected in your FICO score as it only evaluates the information retained by the credit reporting agency.

What are the factors that affect your credit score? Five main factors are used in calculating your overall credit score.

1.) Previous credit performance (payment history) 35%. A lender wants to know what your payment history is like. Your payment history is just one piece of information used in calculating your score, although it can be very important.

2.) How much debt do you already have? (amount owed) 30%. Can the borrower afford to pay their existing bills and still pay this new credit? Most lenders want to know the answers to these types of questions and these answers are almost as important as your previous credit history.

3.) How long have you had your existing credit? (age of credit) 15%. The longer credit history the better score in general. This does not mean that people with short histories, young people, or students can't still have a high overall score as long as the other factors are good as this factor makes up only 15% of the total score. With no credit history you need to open an account, pay on it, and wait in order to improve this part of your score.

4.) Recent credit activity 10%. If you Shop for credit and to find the best rates to meet your needs that's good, but, every time a lender checks your credit, an inquiry is produced on your credit reports and this can be negative. However, FICO calculations take credit shopping into account by treating group of inquiries which probably represent a search for the best rate on a single loan as a single inquiry (auto or mortgage loan inquiries only). Inquiries that were within 30 days of each other on an Auto loan count as one inquiry. You should avoid frivolous inquiries as they may hurt your score. Things like applying for credit card offers will add inquiries to your file and may reduce your score even though the system takes into account rate shopping.

5.) The credit type mix 10%. FICO likes a variety of different types of credit including installment loans and revolving loans. Good examples of Installment loans are Mortgages, auto loans, and personal loans which allow you to repay the loan over a specific period of time with fixed monthly payments. Revolving credit remains fully open as long as the limit has not been reached and it allows you to repay without specific fixed payments (home equity lines of credit, credit cards, and retail store accounts). A more detailed review of Credit Scores is available for FREE.