You And Your FICO Score

Summary: Your ability to qualify for any kind of financing - from credit cards to auto loans to mortgages, depends greatly on credit scoring. Most creditors will draw your credit report to look at your FICO score. The FICO score will be used to evaluate your qualification for a particular credit line or loan program and to calculate the applicable interest rate. Depending on their specific institutional needs, some lenders may use the highest FICO score or the middle score, or only...

Your ability to qualify for any kind of financing - from credit cards to auto loans to mortgages, depends greatly on credit scoring. Most creditors will draw your credit report to look at your FICO score. The FICO score will be used to evaluate your qualification for a particular credit line or loan program and to calculate the applicable interest rate. Depending on their specific institutional needs, some lenders may use the highest FICO score or the middle score, or only one FICO credit score if the credit transaction is for a consumer purchase. For instance, if you were to apply for a house credit card at a department store, they would run your credit profile (with your permission, of course) to obtain a FICO score. On the assumption that the store reports to only one of the three credit bureaus - as most department stores tend to do -, then the inquiry will go only to that bureau. The store would make its decision based on only one bureau's information, and by using only the one FICO score. The system works differently for mortgage credit. Banks report to all three credit bureaus (Experian, Equifax and Trans Union), so they would get three different FICO scores, calculated on three credit reports that the credit bureaus sent for scoring by FICO. Since there are three FICO scores, banks generally will use the middle or average FICO score. Depending on the type of financing you are seeking, whether it is for a new car, appliances, a credit card, or a home mortgage, your FICO score makes up a significant portion of the decision-making process. The FICO score will determine the premium rates you pay for insurance and the interest rate available to you on a loan. Your FICO score is usually a composite of the following: 35% of your FICO score is payment history, and the key items include frequency, severity, and most recent occurrences of non-payment - which means that all late or missed payments will hurt your FICO credit score, but missed payments of more recent dates will have bigger effect; 30% of the FICO score is credit utilization, and estimates the balance of credit accounts in relation to the maximum credit available, with revolving credit lines (usually, credit card accounts) being the most significant; 15% of FICO scores cover credit history, the number of years credit has been established (the longer, the better; and one trade credit line for 5 years will affect the FICO credit score better than 2 trade lines for 6 months); 10% of the FICO score involves type of credit, which will monitor the mix of revolving credit inquiries, but will not include inquiries with no finance rating (as an inquiry from your employer, for instance). As mentioned earlier, there are three FICO scores developed by the Fair Isaac Company - one each from the three major credit bureaus. Experian has the Experian/Fair Isaac Risk Model; Equifax has Beacon; and, Trans Union has Empirica. Consumers are likely to have a different rating with each agency, because although they all use the FICO model, each credit reporting bureau has its own set of reporting companies and there may be variations in the credit information that they send for calculation of FICO score. There are other types of FICO scores: