Understanding Your FICO Score
What goes into those “FICO” consumer credit scores?
Credit scores are used by lenders as a model to help them determine the likelihood that a borrower will make timely and consistent payments. The model, developed by Marin County, Calif.-based Fair, Isaac and Company, is derived from long-term analysis of millions of consumers’ credit histories. (Credit ‘scores are also called FICO scores, the initials of Fair, Isaac and Company.)
The predictive model has held up pretty well. A study by Freddie Mac showed that only one in 100 borrowers with high scores – above 600 – fell behind in their payments. On the other hand, more than one out of three borrowers with scores below 600 were 60 days late on their mortgage payments
Although a good credit risk and a truly terrible credit risk have always been easy to spot, credit scoring provides a way to measure the credit- worthiness of people who fall in the vast middle.
Additionally, with more people than ever taking advantage of low down payment loans of 5% or less, it has become imperative for mortgage lenders to use sophisticated models that help them make intelligent underwriting decisions, while approving as many people as possible
But what actually determines credit scores continues to be a mystery – to borrowers and lenders !alike. [Largely because, for years, Fair Isaac and Company flatly prohibited the lenders using its system from revealing to consumers their actual FICO scores, let alone the way in which the scores were arrived at.]
Now, Fair, Isaac and Company is taking strides to demystify its FICO scores. Soon, the company says, mortgage applicants will not only be able to obtain their credit scores, but will be able to go online to find out what individual factors in their credit pro- files are affecting their scores. Cool.
In the interim, Fair, Isaac has released some details on the “weight” they give to certain aspects of one’ ~ credit history. Here are some highlights:
- 35 % of your score is determined by the payment histories on your credit accounts, such as general credit cards, department store cards and car loans. The model assigns greater weight to recently missed payments than any late payments from years ago.
- 30 % of your score is based on the amounts you currently owe creditors. The statistical model sometimes gives a slightly higher score to people who show an unpaid balance on a credit card or two (but with no late payments) than it would to those, who run no balances at all.
- Another 15 % of the credit score is tied to the length of time you’ve been a credit user. Simply stated: the longer the better, assuming you’ve paid your bills on time.
- Approximately 10 % of the FICO score is based on whether it appears as if you are loading on additional credit. For example, have you applied for (and received) new loans aor lines of credit in the recent past? The more you’ve done so, the lower your score.
- Finally, about 10 % of the score is based on the type of credit sources you have. For example, a loan from a household finance company, with its higher rates, might be deemed as riskier to pay back for the borrower than a home equity loan from a mortgage banker.
For more information, go to www.fairisaac.com on the web and click on “Understanding Your Credit..”
