What it means
Fair Isaac Corporation was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac, and it introduced the FICO Score for general lending in 1989. Before that, lenders relied on manual judgement and inconsistent reports.
A standard score made decisions faster and more comparable, and it opened the door to automated underwriting (computerised assessment of a loan application). The score is built from data held by the credit bureaus.
FICO publishes the broad weightings: payment history carries about 35%, amounts owed about 30%, length of credit history about 15%, new credit about 10% and credit mix about 10%. The exact formula is proprietary, and the weightings differ slightly between individuals.
Lenders use the score in several ways. It can set an approval cut-off, determine the interest rate tier, or decide how much deposit or security a borrower must provide.
A difference of fifty points can move a mortgage rate enough to change the monthly payment by a meaningful amount over a thirty-year term. For businesses, the score matters in two ways.
Owners of small firms often borrow with personal guarantees, so their personal score influences business credit decisions. Companies that lend to consumers, such as car dealers, card issuers and landlords, use scores to design underwriting policy and pricing.
There are many versions of the score, tailored to products such as mortgages, auto loans and bank cards. A consumer therefore has not one FICO Score but many, which can differ depending on the version and the bureau data used.
This is why a number from a free monitoring service may not match the figure a lender sees. Improving a score is mostly a matter of habits: paying on time, keeping balances well below limits, avoiding unnecessary applications and keeping old accounts open.
There is no quick trick, and organisations that promise to erase accurate negative information should be treated with caution.
In practice
Real-world examples.
Example
A couple applying for a $400,000 mortgage find that a lender offers its best rate only to borrowers with scores in the top band. Their scores sit just below the cut-off, so they pay down card balances for three months and reapply. The improvement in utilisation lifts them into the better tier.
Example
A used-car dealer offers financing to buyers with weaker credit. It uses an auto-specific FICO Score to decide how large a deposit to ask for, requiring more cash up front when the score is lower.
Example
A landlord screening a tenant for a rental property asks for a credit report with a score. A short history and several late payments lead her to request a larger security deposit before signing the lease.
Formula
Calculation
FICO's scoring formula is proprietary, but one input is easy to calculate and strongly influences the score:
Credit utilisation = Total revolving balances / Total revolving credit limits
A borrower has two cards. Card A has a $2,000 balance on a $5,000 limit, and card B has a $1,000 balance on a $10,000 limit. Total balances are $2,000 + $1,000 = $3,000, and total limits are $5,000 + $10,000 = $15,000, so utilisation is $3,000 / $15,000 = 20%. If the borrower pays down card A by $1,500, balances fall to $1,500 and utilisation to $1,500 / $15,000 = 10%, which generally helps the score.Case study
Seen in the real world.
Linden Bakery Supplies is an illustrative, fictional business whose owner, Maria, wanted a $150,000 loan to buy new ovens. The bank asked for a personal guarantee and quoted a rate higher than she had expected, citing her personal credit score.
Her accountant reviewed her credit report and found that her utilisation was high because the family had put several business purchases on personal cards. She moved those balances to a business line of credit, paid down the cards, and waited two billing cycles for the changes to be reported.
In this illustrative story her score rose enough to move into a lower rate tier, which cut the interest cost of the loan by thousands of dollars over its term. Maria now keeps personal and business spending separate so that her score is not distorted.
Watch out
Common mistakes.
- Believing there is only one FICO Score, when each lender may use a different version and different bureau data.
- Closing old credit cards to tidy up, which can shorten credit history and reduce available credit.
- Applying for several loans or cards in a short period, which creates multiple hard inquiries and can lower the score.
Questions
People also ask.
What is a good FICO Score?
Ranges vary by lender, but scores above the mid-700s are generally treated as strong, and scores below the mid-600s as higher risk.
Does checking my own score lower it?
No, checking your own score is a soft inquiry and has no effect.
Is FICO the only credit score?
No, VantageScore and lenders' own models are also used, but FICO is among the most widely used by mortgage and consumer lenders.
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