FICO Score Basics
FICO stands for “Fair Isaac Corporation” which was the first provider of credit scores. Basically, a FICO score is a measure of how good or bad a person’s credit is. The higher the score, the better the credit. There are many factors that can affect a FICO score and it is important to understand and be aware of them because FICO scores play a large factor in a person’s ability to get a loan for a house or a vehicle, how much they pay for home and auto insurance, and in some cases, their ability to get certain jobs. There are three credit reporting agencies that are accepted and used by lenders: Experian, Equifax and Transunion. Each agency calculates its own score independently of the others.
FICO score range:
FICO scores range from 300 to 850. Typically, if a person has a score of below 620, they are considered to have “bad” credit. A person with a score of 620 to 700 is considered to have fair to good credit and those with scores of 700 and above have “great” credit. People usually need to have a FICO score of 640 or better to get a conventional loan to buy a home and need at least a 600 to get a decent loan to buy a vehicle.
What Affects FICO Score?
There are a number of specific factors that affect FICO score. The main and most obvious factors are payment history, collection accounts and number of credit inquiries. Payment history is simply how good or bad a person has been at paying debts on time. Credit cards, vehicle loans, and mortgages will all report a person’s payment history to all three credit bureaus. A history of paying all loans on time and never having a late payment will increase the credit score, while even one instance of being late on a payment will drop the score. On average, payment history will account for approximately 35 percent of a person’s FICO score. Collection accounts are debts that have not been paid and have been written off by the original creditor and bought by a third-party collection agency who will report the debt to the credit bureaus as a collection or charge-off and attempt to collect the debt. The first time a collection account shows up on the credit report it will drop the FICO score by an average of 100 points. Credit inquiries are notations on a person’s credit reports that are made when their credit reports are pulled. Typically, a person’s credit report is pulled when they are applying for a loan or for a credit card. Each time an inquiry is logged on a credit report, it causes the credit score to fall by approximately 5 points. Many mortgage lenders will not approve a loan if there are more than a certain number of recent inquiries. People who are shopping for vehicles typically end up with numerous inquiries because dealerships will usually shop the loan among various lenders, with each lender generating an additional credit inquiry. Inquiries will stay on the credit report for two years but will only affect the score for the first year. A very important but seldom understood factor that affects the FICO score is credit utilization. Credit utilization means the percent of the total credit available that is used. People who have none or a very small balance on their credit cards will have a significantly higher score than people who are maxed out or even have more than half of their total credit lines used. Credit utilization makes up 23 to 30 percent of a person’s FICO score. One of the quickest ways to raise a FICO score is to pay down lines of credit to under 25% of the total credit lines available, and, in some cases to open a new line of credit to increase the total credit limit available. The age of the credit and the mix of the type of accounts also affects the credit score. The longer a person has had accounts reporting to the credit bureaus, the higher the FICO score. A person who has only accounts that have been opened recently will score lower than a person who has established accounts reporting for years. People with only credit card accounts reporting to the credit bureaus will score lower than people who have credit cards, vehicle loans and mortgages reporting.
How do I get my credit score and report?
Normally, people only get their credit report and score when they are applying for a loan. If a person is denied a loan or approved with rates or terms worse than applied for, a person has a right to obtain a free copy of their credit report. However, this is typically only from one of the three credit reporting agencies. There are a number of online providers of credit reports and scores that a person can pay to get a copy of their report and scores. The cost of this will vary but is typically around $20 per credit agency. Also, there are online resources that allow a person to obtain a free copy of their reports and scores from all three credit bureaus for free, but this can only be done one time per calendar year.
What if there are mistakes on my credit report?
There are frequently mistakes and inaccurate information on a person’s credit report. Each credit reporting agency has a dispute process by which a person can formally dispute inaccurate entries on the reports. This can be done online at the credit agency’s website, or can be done in writing and mailed in. Typically, the dispute process can take thirty days and will sometimes require that the person provide additional documentation to verify their claim. If the credit agency cannot verify that the disputed entry is accurate, they are obligated to remove it from the credit report and adjust the score accordingly. If there is an item to dispute, the dispute must be turned in to all three credit reporting agencies.