How the FICO Credit Scoring System Works

Your FICO credit score determines your overall financial options. You should know your score, or at least have some ball park idea of where you rank in the system. If you know your FICO score then you will know if you can expect to receive a low interest credit card or a high credit limit or a mortgage with a low down payment etc. Of course, even if you know your score you may still have some questions about how the system works. After all, there are many people who feel that they should have a higher FICO credit score than they do. If you know how the system works then you can determine how to improve your score.

It does not take a financial expert to understand how the FICO credit scoring works. In fact, once you know the ins and outs of the system you will not only know how it works but you will also be able to use this information to improve your credit opportunities.

Your FICO credit score is calculated by the Fair Isaac Corporation, hence the name. The Fair Isaac Corporation uses the information provided by the three credit reporting agencies: Experian, TransUnion and Equifax,to create a numerical score that summarizes your credit standing. If there is inaccurate information on your credit report your score may suffer

The FICO credit scoring system takes the following information into consideration:

35% Payment History
30% Amounts Owed,
15% Length of Credit History
10% New Credit Accounts Opened
10% Type of Credit Mix (auto loan, credit card, bank loan, mortgage)

As you can see, your payment history is the biggest part of your FICO credit score. If you have never missed a payment or delayed a payment you will always have a good chance at a high score as long as the other four areas don’t suffer. Those who are trying to increase their credit score may need to focus on one or several of the five factors above. For example, it may help your credit score to buy a new car on credit (as long as you pay all your car payments on time). This is because you are adding a new type of credit to your credit mix and you are increasing the amount of money you owe. Your FICO score actually rewards you for taking out loans. But don’t open too many new credit cards or your score will go down. Your FICO score will go down slightly if you close an old credit card account.

Why should you worry about whether you have a high FICO score or not? Credit card companies give consumers with the highest FICO scores the best and most extensive benefits, such as high credit limits and lower interest rates. Home Mortgage lenders offer those with high scores the best home loan options and smaller down payments. In fact about 3/4 of all lenders use FICO scores when considering requests for loans or credit.

Here is a chart that summarizes FICO scores and what kind of credit you can expect:

• Excellent Credit: FICO score 750-850
• Good Credit: FICO score 660-749
• Fair or Average Credit: FICO score 620-659
• Poor Credit: FICO score 350-619
• No Credit: FICO score 0

The federal government has mandated that each of the three credit agencies give everyone a free credit report once a year. But unfortunately this free report does not include your FICO score.  This is something you may have to pay to receive. There are also many types of services that may also be helpful for example an automatic email if your credit score changes or credit coaching to help you improve your score.