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Though Fair, Isaac and Company (FICO) is pretty secretive about how exactly a FICO score is calculated, there are certain criteria that they look at including payment history (35%), amount of debt owed (30%), length of credit history (15%), types of credit (10%), and new credit (10%). The higher your FICO number, the more likely you’ll be to qualify for low-interest credit.
Chances are you’ve heard of your FICO score and consider it pretty much interchangeable with your “credit score.” This article will explore how one corporation came to be synonymous with the “credit scoring” industry and give a little insight into how a FICO score is calculated based on your credit history.
While your credit report is a record of your payment history, your credit score is a number lenders and banks use when determining whether to lend you credit. Sometimes even landlords, employers and insurance firms use your FICO score to determine your responsibility when it comes to paying back debt.
Introduced in 1989 by Fair, Isaac and Company (FICO), a majority of banks and creditors now use the score to guide the loan or credit process. FICO uses reports from the three national credit bureaus–Experian, Equifax, and TransUnion–to calculate these scores. As you probably know if you’ve ever used a service like Credit Karma to check your own credit score, the classic score can vary based on the information provided by the credit bureau.
Though FICO doesn’t release the exact way your score is calculated, in general, a score is based on the following factors:
FICO only uses the information in your credit report to assign you a score. In general, FICO doesn’t care about the following when calculating your score:
There are several other types of FICO scores including bankcard, personal finance, mortgage, installment loan, or auto loan. The range for the classic FICO score is between 300-850. If you are in the market for a business loan, the types of loans you can qualify for will depend on your credit score. The scores generally line up like this:
Generally, having poor credit will make it very difficult to get credit from a lender. It’s very likely that applications in this range may only qualify for a secured credit card or loan, meaning you should expect to put down cash before you’re extended any credit.
A score that falls under 669 but above 580 is considered fair. Applicants in this range may be approved for a loan, but should expect subprime rates that are significantly higher than the interest rates offered for higher credit scores.
A good FICO score is the average for most U.S. borrowers. This range will is considered acceptable to many lenders and most applicants will qualify for a wide array of credit cards and loans. That said, they will likely not be offered the best interest rates available. If you’re interested in an SBA loan, this is typically the lowest FICO score range that will be approved.
Very good credit scores will provide applicants with even better interest rates and approval odds.
An excellent (or even perfect) FICO credit score is the range many borrowers strive for. This range will open up a wide array of options, including the very best interest rates and terms on the market.
According to FICO, the median average score was 711 in 2011. In 2003, the passing of the Fair and Accurate Credit Transactions Act allowed consumers to get a free copy of their credit report once a year from each of the credit bureaus. For your own free copy, check out Annualcreditreport.com (and don’t fall for fake competitors who will try to charge you!)
Every month lenders report updated account information to the credit bureaus. Depending on what is reported, this may or may not change your FICO credit score. Each time you or a lender requests your FICO score, it’s recalculated, but it may not change depending on whether your credit report has changed.
In addition, your FICO score automatically changes from time to time as you make on-time payments and improve your credit utilization ratio. That said, it may take a few months to see a big change to your FICO score, even if you’ve made positive changes. According to FICO, on average only one in four people saw a 20-point change over a three-month period.