Understanding your FICO score

Published 9:37 am Tuesday, January 26, 2010

Like many individuals, you may be unaware that a numerical score, known as FICO, affects you when you borrow money. Lenders use this approach to evaluate your creditworthiness.

The FICO score is named after the firm that developed it, Fair Isaac Corporation.

It has gained widespread use because lenders contend that an automated system of credit scoring, such as FICO, allows them to make faster lending decisions.

FICO is used by the three major credit bureaus — Equifax, Experian, and TransUnion —and is calculated by comparing an individual’s credit information to that of other consumers. Scores range from 300 to 850.

The largest component, comprising about 35 percent, is based on your past payment history. The critical factors are late payments, delinquencies, and bankruptcies.

About 30 percent of your score is based on how much you owe. This includes amounts owed on all accounts compared to the original amounts of the loans.

The length of your credit history is about 15 percent of the score. The model examines the length of time since any accounts were opened and how often you have used them.

New credit applications account for 10 percent.

This takes into consideration not only the number of newly-opened accounts but also recent credit inquiries made by lenders or others.

The final component, also 10 percent of the total, is the type of credit used. This component may have information about your credit cards, installment loans, mortgages, home equity loans, or other types of credit.

Keep in mind that FICO analysis considers only the information in your credit report as compiled by one of the three credit bureaus. Fortunately, some lenders have latitude in making credit decisions.

Before making a final decision, they may also consider how long you have lived in the community and the length of time you have been employed in your present job.