What Is a FICO® score?
October 19th, 2008 Posted in Personal Finance
What Is a FICO® score?
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The FICO® score is a number (a credit score) between 300-850®. FICO® score is the most widely used credit scoring system in the world. Most of the financial institutions in North America use FICO® score to determine an applicant’s credit risk. Fair Isaac Corporation – the pioneer in credit scoring, developed the FICO® score. Engineer Bill Fair and mathematician Earl founded this corporation in 1965.
A high FICO® score is considered a good score for consumer. Most consumers score in the 600 score and 700 score. Above 700 score mean you are in good financial position and lenders will most likely approve your credit request. Below 600 score indicate you are a high-risk client and lenders will most likely decline your credit request or will approve with much higher interest rates. Lenders buy your FICO® score from credit reporting agencies such as Equifax, TransUnion.
Five Parts
FICO® score is based on the five general categories:
- Payment History = 35% – Paying bills on time helps. Avoid late payments.
- Amounts Owed = 30% – If you owe a lot of money, it lowers your score.
- Length of Credit history = 15% – A longer history increases your score.
- New credit = 10% – Too many credit inquiries will lower your score. Lenders consider you a high-risk client when you actively seek credit.
- Type of Credit = 10% – If you use a combination of different types of credits such as credit cards, mortgage, car loans etc, and have good paying history – it may increase your score.
How To Obtain FICO® score
A regular credit bureau report does not provide FICO® score. For example, regular Equifax Credit Report costs $15.50; however, it will not show your FICO® score. To see you FICO® score, you need to purchase Score Power Credit Report – it costs about $24
Do You Really Need To Know Your FICO® score
Not really. I don’t see any point spending $24 to see your FICO® score and I don’t recommend it. If you are dying of curiosity to know this and can justify spending $24, then go ahead. What I do recommend – check your credit report once a year. Keep an eye on any unusual transactions, personal information changes, or anything that does not make sense. You can spend about $15 annually to obtain your credit report online, or you can order this free by sending fax or by sending a traditional post mail. Three credit agencies in Canada provide this free service and I will talk about it in another post.
4 Responses to “What Is a FICO® score?”
By Briar on Aug 4, 2009
I think knowing your FICO score is a great tool for working towards improving your financial health. Sure, if you are fully established, and know you ahve a great score, maybe have a double income, and have never missed a payment on anything, then fine, don’t waste the $25. However, if not.. read on.. I pulled my two credit reports today, and I can see exactly where, when and how to move into a more positive state. My score is over 700 now, but even when the few “derogotory” comments are removed, I will still be in position where, if i’m not careful, I could impact my credit poorly (simply to switching credit cards for a lower interest rate, signing back a “preapproved” credit card, or choosing to “not pay for 15 months” on some furniture… all these things affect your credit, and in most cases, not in a positive way. I can see how having a clear undersanding will govern and impact the way that I think of credit in the coming years, and I wish that I had been this proactive earlier in my financial history, as I could not have a much higher score (not because of poor payments, only because I’ve taken advantage of seemingly harmless credit options, which have reflected not-so-positively on my scores).