FICO® Scores / Credit Scores - Explained
What do FICO® Scores mean? FICO® scores are credit scores that were developed by Fair Isaac Company, a California company that specializes in the construction of statistical scoring models. This credit score is a single number ranging from
300-850®. . The number is calculated using past credit history data. Fair Isaac Developed this scoring model using millions of actual consumer credit data files to develop a complex and secret mathematical algorithm. Since FICO® is the developer and owner of the scores model, it is proprietary, consequently it is impossible to know exactly all of the credit variables considered and how they are weighed by FICO®. (APPLY NOW)
Each Bureau calls its FICO® scores something different (Equifax-Beacon, Trans union-Empirica, Experian-Fair Isaac). But the score it represents is the same no matter what bureau you use. However, the actual credit scores given by each bureau can and often do vary. The risk is defined in the number of accounts that default based on these scores. Some example ranges include:
Scores below 601 yield 8 good loans per each bad one. (fair to poor credit scores)
Scores from 700-729 yield 129 good loans per each bad one. (good credit scores)
Scores at or above 800 yield 1,292 good loans per each bad one. (top credit scores)
As you can see, overall the FICO® scores that are generated are a good predictor of a bad loan. They are used to alert the lender that possibly more investigation is needed, rather than using it just to deny a loan.
The FICO® scores that we receive when we order a credit report is obtained from the bureaus and is based solely on the "raw credit" as delivered to us by Trans Union, Experian, and Equifax - Also known as a Tri-Merged Credit Report. This type of credit report is the best of it's kind and usually the middle of the 3 scores is used to represent your actual or overall credit score. If only two FICO® scores are given, the lower of the two credit scores is used.
The FICO® Scores model contains 33 variables that were found in combination to be most predictive of an individual's future ability to repay a loan. These 33 variables are grouped by FICO® into five categories. They are:
Previous credit performance (credit history overall)
Current level of indebtedness (how much in debt is the borrower
Amount of time that the credit has been in use (reputation with a lender)
Pursuit of new credit (Not having too many inquires in the last 12 months)
Types of credit available (Home Loans, Auto Loans, and Credit Cards are the best)
FICO's scoreing model evaluates how these variables interrelate and supposedly how the interaction will likely affect mortgage performance. By evaluating the historical performance of loans with borrowers' credit characteristics, FICO® claims they can tell us something about the future performance of loans with similar credit characteristics, i.e. the risk of extending credit .
Accompanying FICO® scores are four "reason codes". These codes identify four of the 33 variables that have the most influence on lowering the credit score. This gives us some insight into the credit score. Examples of reason codes are:
Current delinquency - (Often the last 12 months is the most important)
Too few accounts paid as agreed (Otherwise may suggest negitive credit history)
Too many inquiries in the last 12 months (Again, don't overextend your credit limit)
Proportion of balances to credit limit is too high on revolving accounts (Don't go over 50% of your available credit limit passing a payment period)
FICO® Scores / CreditScore - Fixing and Maintaining Good Standing
The best way to keep your FICO® scores high is to pay your bills on time, avoid collections (i.e medical collection) and bankruptcies. If your score is already low, the following is a quick checklist of things that you can do to improve it.
Pay down any credit cards to below 50% of available credit
Close all accounts that have ever been late
Close all but two or three revolving accounts
Limit the number of inquiries made on your file in the last 12 months
Pay all collection accounts and get physical proof they were paid
Write a dispute letter to the credit bureaus on all negative items (go online or print off the dispute forms and mail in. We suggest both since writing takes about 90 days.)
Legal Online Credit Repair at Lexington Law.com (This company charges a low monthly fee and takes care of everything for you including removing some negitive items.)
Web Site Addresses:
www.experian.com, www.transunion.com, www.equifax.com
Credit Bureau Mailing Addresses:
Experian (XP) P.O. Box 2002 Allen, TX 75013
Trans Union (TU) P.O. Box 2000 Chester, PA 19022
Equifax (EF) P.O. Box 740256 Atlanta, GA 30374
NOTE: You can go online and pay $9 for your FICO® Scores and credit report from each of the reporting bureaus. After you have ordered it, you can dispute anything right away online. It will show you negative and positive entries alike. We recommend disputing all or any negative information as often as you can. If a reporting account on your credit report does not respond within a 30 day time frame, the reporting bureau is then required by law and Section 611 of the Fair Credit Reporting Act to take it off your credit report.
