FICO Score in its classic form is the three-digit number which ranges between 300 to 850, many other scores which are industry-specific have different ranges. This system of scoring was developed by 'Fair Isaac Corporation' in 1989 which now called as FICO, which enables the creditors to get a quick and fair idea about the individual as per his credit risk.
FICO system of scoring is currently used and exercised by about more than 90% of the lenders, and these scores have been sold over 100 billion of lenders and to the individuals worldwide. Now a day's FICO scoring is accepted and increasingly being used outside of the financial arena too by insurance companies, employers, landlords and sometimes also in armed forces so that they can evaluate the potential risks.
How Is FICO Score Being Calculated?
FICO uses to break down to calculate a score into these main components:
- Payment History - 35%
- Credit Utilization - 30%
- Length of Credit History - 15%
- Types of Credit Used - 10%
- Recent Searches For New Credit - 10%
So, the FICO score is being calculated by looking at individuals credit report. Every individual usually has three credit reports each one is generated from each of three credit bureau namely - the TransUnion, Equifax & Experian.
So, it means everyone has multiple FICO scores, and the data found in these credit report is broken down into five components or categories which are - payment history, credit utilization, the length of credit history, types of credit used and recent searches for new credit. Below we will see the importance of each one of these categories.
Payment History 35%
Payment history is one of the most critical factors in determining the FICO score, and it accounts for 35% of the total. Lenders would always like that every money they are going to lend should be repaid and of course with fees and interests, so they put much emphasis on the payment history or say the history of repayment.
In the case the repayment is being late, or in some of the cases no payment have been not made at all which is also called 'Delinquency' then the algorithm used to calculate the score in FICO will take account of this and below are the things which will have a not so good effect on the score:
- How late the payment was made
- How much was owed
- How recently it happened
- How many other missing or late payments are there
If you are having a track record or little or no late payment at all, in that case, you will have increased FICO score, and in the same way history of late payments will lead to lower FICO score.
Credit Utilization 30%
Credit utilization is simply the ratio of the amount of the money borrowed divided by the total amount of credit available to them and this factor account for about 30% of a FICO score. There are revolving credit like credit cards count towards the majority of your credit utilization ratio which is about 95%, and loans installments count about 5%.
Amount OwedTotal Amount of Credit= Credit Utilization Ratio
You should understand that credit utilization is not having any history so you should take care of it when you are opting for the loan, it seems very strange that it is beneficial to have only one account with a balance and the creditors are in the business of making money and if consumer has a zero money owing.
Length of Credit History 15%
Credit history length makes up about 15% of the FICO score, but you should understand that it's not only the old account which will be looked at but also FICO consider the following factors:
- Age of oldest account
- Age of newest account
- The average age of all account
- How long since the specific account have been used
The older will be your credit history the better will be your FICO score; this is because it shows the lenders that borrower is having very long repayment history, is experienced and shown the same behavior over the long period.
Recent Searches For New Credit 10%
Recent searches for the new credits add up to 10% to the FICO score algorithm, if you are having a lot of recent searches for the new credit will affect negatively on the FICO score because usually this behavior is considered risky for the lenders. It's weighted more heavily when not much other credit information is available.
If you open new credit accounts it will affect negatively on your FICO score, they will also cause the average age, and the account which you have opened recently will drop the age and affect the score further under 'credit history length.' You should always think before opening new accounts unnecessarily.
Types Of Credit Used 10%
Types of credit used will account for 10% to your FICO score. There are two main types of credit - Revolving & installment. Lenders look for the people having multiple types of the credit and in the case when industry-specific scores are used the scoring model will give more scoring to the type of credit more similar to the specific scoring model. Let's discuss the two types of credit model as below:
- Revolving Credit - A revolving credit generally has the predetermined credit limit that the owner can borrow up to that limit. Interest is usually paid on the amount borrowed and not on the credit limit. And once the money is paid back in a given period, it can be re-borrowed. The common type of revolving credit is a credit card; there are some other types also like store cards and line of credit for business.
- Installment Credit - Installments credit accounts usually have a fixed number of payments that must be made. Interest is paid on the whole amount which is owed it does not matter how much of credit the borrower is usually using. If the money is paid back, that does not mean you can re-borrow the money and if you need to re-borrow the money you need to refinance the whole amount needed. It is usually used to make a large purchase of services or products. The most important type of installment credit is mortgage loan or an auto loan.
Types of FICO Scores
As per current scenario there about 49 types of scoring algorithms used by the FICO, which are available to the creditors so that they can take good decision while lending the money & nine of these were also accessible to the individuals.
The main reason for FICO having so many algorithms can be there are some industry-specific scores (34 in total) that are rarely used and differentiate much from the classic nine scores. There are also 6 NextGen scores which are also used rarely by the lenders, but these are not accessible to the individuals.
Free FICO Scores
There are usually some ways to obtain your free FICO scores, and most the ways are being constantly added. Here, we will discuss the ways to get the free FICO score, and you must be knowing by now that FICO scores are used to take about more than 90% of the lending decisions.
If you want to have some knowledge about FICO score ( the score which is not used by the lenders), then you should take help one of the ' free credit monitoring websites' such as - Quizzle, Credit Karma or Credit Sesame. Below we will see the ways to get the free FICO score:
- FICO Score Openly Available - You can browse the recently launched website creditscorecard.com, this website offers everyone the free access of their free Experian FICO score. It gets updated in every thirty days or the next time you get to log in the website.
- Credit Cards - Most of the credit cards have now started to offer free FICO score to their cardholders. As this is a part of 'FICO open access program' and the cards which allows the free FICO score is as follows - American Express, Bank of America, Barclaycard, Chase, Citi, Discover, First National Bank Omaha, Huntington Bank, PenFed, Merrick Bank, PSECU, Walmart, Wells Fargo, etc.
- DCU Checking - In case you have DCU checking then you have either DCU credit card or you can receive a direct deposit into your checking account and you will receive a free Equifax Classic Risk Score 2008 (EQ-08). You just need to be a member to apply from your checking account.
- Save And Invest - Save & Invest usually offers two different types of scores which are - TransUnion Classic Risk Score (TU-98) and Equifax Classic Risk Score 2004 (EQ-04) which is offered to active military members and their spouses in partnership with myFICO.
- Unitus Community Credit Union - if you have Unitus checking account and if you are enrolled for the statements and if you have one of the following - Credit Card, Vehicle Loan, Personal Loan, Home/Equity Loan or Mortgage loan with Unitus then you are also eligible for the free Equifax Classic 2004 FICO Score (EQ-04).
- Ally Auto - Ally Auto financing is now a day's providing its customers with free Experian Auto 2 FICO Score, but you should keep in mind they use to make the updates quarterly not monthly.
- Hyundai & Kia - You can also enroll into the college graduate program which is also called 'College Grad' offered by Hyundai Motor Finance or Kia Motor Finance then you can also get access to your free FICO score, but you should always keep in mind that your score will get updated on quarterly basis. You can find out more about their college grad program when you browse through their websites.
- Through Adverse Actions - In case you are denied for the credit or given less than favorable terms, then lenders must provide you with notice of adverse actions. And when you are given this notice, then this notice must prove the reason as to why you are denied or offered with the less than favorable terms. In most of the cases if you are denied the credit is because of your credit score. In this situation lenders usually tells the consumers with their credit score and the range of the score they are using. As we all know about 90% of the lenders, rely on FICO scoring, and there is always a high chance that you will also be provided with the credit score of yours. The type of the score which you will receive will be dependent on the what the lender must have been used in their decisions. Bear in mind that this is a terrible way to check your credit score as it is required that you need to be denied for the credit or any kind of loan or credit card before you get to view your credit score.
- Applying For The Mortgage - In case you have opted to apply for the mortgage then in this situation the lender must also provide you with your score before making any decision. In most of the cases, all the lenders use to pull all three of your credit report when you apply for the mortgage that means that you will get to see your score from Equifax, TransUnion & Experian. But you should also keep in mind that to just to get to view your credit score it is not a good habit to apply for the mortgage. It is imperative to check your credit score before applying for the mortgage, and it is always advisable that you should get your credit score by paying sometimes.
- Through Your Student Loan - Sallie Mae offers score from TransUnion FICO score for free to the borrowers who have loan disbursed in the academic year 2014-15.
Through these above-mentioned ways you can get to see your FICO score for free, but there are some weird methods were also listed, and you should always keep in mind that it will be fine if you pay to view your credit score and report.