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FICO stands for Fair, Isaac and Company, a
California firm founded in 1956 by Bill Fair and Earl
Isaac. They created a unique credit scoring system
based on the FICO rating system. This rating system
include several parameters from your credit file
including length of credit history, number of open
accounts, loans, mortgages, and public records that is
formulated to produce a 3-digit score between 300 and
950.
If your credit score is above 680, you are considered
a “prime” or a low risk in terms of someone who
wants to rent or lease to you. If your score is below
680, you are “sub-prime” and fall in the middle
category in terms of risk of renting/leasing. Anything
below a 560 is considered a “shafted’ score and
this person is not someone who is a good credit risk.
A prime score means you are a good risk. A sub-prime
score doesn’t mean you shouldn’t get a
rental/lease, but you may be required to go a step
further in terms of possibly providing a security
deposit or first and last month rent payment before
move in. Shafted scores are not good risks as tenants,
but again doesn’t mean you shouldn’t get a rental
or lease. Further provisions may be required from the
landlord.
How a FICO Score is Calculated
1. Previous Credit Performance (Payment History) 35%
Payment History on accounts includes credit cards,
retail accounts (department store credit cards),
installment loans, finance company accounts and
mortgage loans.
Collection Items and public records include judgments,
bankruptcies, suits, liens, collection items and wage
attachments including specific details on late and
missed payments.
Negative information/late pays are determined using
three factors:
Recency – How long ago was the last delinquency. How
old is the late pay? A 30-day late payment made just a
month ago will affect your score much more than a
90-day late payment from five years ago.
Severity – What level of delinquency was reached?
How late was the payment made? 30 days, 60 days, 90
days or worse. Is the payment still outstanding?
Prevalence – How many credit obligations have been
delinquent? The amount of negative items as compared
to your total amount of available credit.
For instance, five accounts showing three late
payments is much worse than ten accounts showing four
late payments. One of the biggest sub-factors is how
many accounts show no late payments. A good track
record on most of your credit accounts will increase
an over-all FICO score substantially.
2. Current Level of Indebtedness (Amount Owed) 30%
How much is too much? Can the borrower pay you and
still afford to pay his other bills? Having available
credit actually helps your ratio of debt to available
credit. These are the types of questions that most
borrowers want to know and the answers are almost as
important as your previous credit history.
Total amount owed on all open accounts. Paying off
your credit cards in full every month does not mean
that they won’t show a balance on your report. Your
total balance on your last statement is generally the
amount that shows in your credit report.
Specific types of accounts, such as credit cards and
installment loans are scored differently and in
conjunction with the overall amount owed on all open
accounts. This also factors into your balance on each
specific type of account. For instance; you have a
credit card with a very small balance and no late
pays. Even though the balance is low, this still looks
very good as it shows that you are able to manage your
credit responsibly. How many accounts are open and how
many have balances? A large number of open accounts,
even with small balances, can indicate higher risk of
over-extension.
3. Amount of Time Credit Has Been In Use (Length of
Credit) 15%
Most often, the longer the credit history, the better
your score. However, this factor only makes up 15% of
your total score so even young people, students, or
others with short histories can stills core high
overall as long a s the other factors show good. IF
you are new to credit than there is little you can do
to improve this part of your score. Open an account
and be patient. The age of your oldest account and the
average age of all your accounts are taken into
consideration. How long it has been since you used
certain accounts as well as the mix of older and new
trade lines.
4. Pursuit of New Credit (10%)
Credit is much more popular today. Consumers can now
shop for credit and find the best terms for their
situation. Every time someone runs a credit check on
you, it creates an inquiry. Are you searching for new
credit accounts or just rate shopping?
FICO handles this by treating a grouping of inquiries
– which probably represents a search for the best
rate on a single loan – as though it was a single
inquiry (note: this only applies to auto or mortgage
loan inquiries).
Inquiries are typically seen as a request for credit
and thus are factored as if you are searching for
credit. Every time you fill out one of those credit
card applications to get a free hat, you are also
getting a free inquiry. Every time you fill out an
online application for a credit card, or other type of
loan, you are getting an inquiry. Too many inquiries
look bad. While there are no good inquiries, there are
neutral inquiries. These are most often known as
Consumer Initiated. A request for your credit reports
shows as a consumer inquiry. Inquiries created as a
result of periodic reviews are not supposed to be
factored into your credit score.
5. Types of Credit Experience (10%)
A healthy mix of different types of credit,
installment loans, retail accounts, credit cards, and
mortgage. This score is not normally a key factor in
determining your score but it can help a close score.
It’s not a good idea to try and open different types
of accounts just to try and make this factor better.
It will likely reduce your score in other areas. You
should never open accounts you don’t intend to use
anyway. Your score takes into account what type and
how many accounts you have, the optimal ratio of
installment versus revolving accounts depends on your
profile, and differs from person to person. One factor
that seems to have significant influence is your
percent of open installment loans. Too many can lower
this portion of your score
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