What Do I Need to Know About My FICO Credit Score?
The Ins and Outs of FICO Credit Scores.
Getting a copy of your credit report from the three credit reporting agencies is only the beginning. Your credit report will show your credit history and other personal information, but it doesn’t show your FICO score. When you look at your credit report, it shows several individual items, but overall, it can be hard to really understand whether a lender will view it as positive or negative. You may have some good entries and a couple negative ones, but when it’s all taken together, what does it mean? The FICO score is what tells a lender if the credit report is good or bad.
The FICO (short for Fair Isaac Corporation) score is an attempt to condense your entire credit report into a single number, from 300 to 850. Having a single number, instead of a long and complicated credit report, makes it a lot easier for lenders and credit card issuers to make their decisions on your credit worthiness. That number is derived from a complex algorithm that weighs all the various information, such as payment history, outstanding debt, and access to credit.
Unfortunately, how Fair Isaac derives this number from your credit report is proprietary information. In other words, you have absolutely no way of knowing how that number was derived, only the general knowledge that improving your credit and reducing outstanding debt will result in a higher score.
Generally though, your FICO score is created as a result of a weighted average of information, with 35 percent of the score being derived from payment history information, 30 percent from amounts owed, 15 percent from length of credit history, 10 percent from new credit, and 10 percent from type of credit used.
This general knowledge is of some use, but the downside of FICO is its proprietary nature. You will never know precisely what their algorithm is, or what Fair Isaac considers “good” or “bad” activity. Do they consider having three credit cards worse or better than having one? No one knows.
While you can get a free copy of your credit report, you cannot get a free copy of your FICO number. You can purchase a copy of your FICO score along with your credit report from the three credit reporting agencies, or you can visit MyFico to purchase it online and view it immediately. If you are working to improve your credit, knowing this number may be valuable to you, since it will show you what you’re up against.
If you’re applying for a major loan, such as a home loan, it would be a good idea to get copies of not only your credit report, but also your FICO score as well before you start your loan search. Additionally, purchasing your FICO number periodically, for example once every six months, will give you a very concrete idea of how much your credit has improved over time. Seeing your credit report gives you the raw information, but seeing your FICO score tells you how lenders interpret that information.
There’s a lot that rides on this number—and a difference of just ten or twenty points can make all the difference, between high interest and low interest, and even between getting credit and getting none.
A score of 620 or below is usually considered the breaking point for “subprime”, and this level of score will yield you the highest interest rates and least favorable terms of credit. A score of 700 or greater will usually result in favorable terms and more credit offers.
The median score is about 725, and the higher your score is, the more favorable credit terms you can receive. Only about one percent of the population falls below a score of 500, and only 11 percent enjoys scores higher than 800.
Additional resources:
Fool.com: How Lenders Keep ScoreBankrate.com: The Power of Credit Scores
Experian: National Score Index
Understanding Your Credit Score
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