FICO: What Is It And How’s It Calculated?

Understanding FICO is one of the most important yet complicated things for you to understand.  Your FICO score are reported to those that are considering lending you money.  If you wish to borrow money to purchase a car or to purchase a home, you’ll need to insure that your score is at the highest possible level it can be.  Indeed, even if you just want a new credit card for day to day use, you’ll need to insure that your FICO score is high enough to be approved for that credit.

Why FICO Matters

Your FICO score is an important number of potential lenders.  If you were to apply to receive a loan, the lender doesn’t know you.  They don’t know that you work hard and maintain a good home and job.  In fact, they know nothing about you until they pull your credit report.  Most lenders don’t just look at the actual credit report, though.  Many look at your FICO score which is a complex mathematical calculation that determines the amount of risk that you are to the lender.

The better your FICO score, the less of a risk you are to them.  The worse your score, the more troublesome you look to a potential lender.  Will you default on the loan?  Will you wind up filing bankruptcy?  These things are determined, in part by what you look like on paper. 

FICO scores are based on a number of factors, but, the overall premise is that these scores take your information on your credit report and compare it to thousands of other credit reports from the past.  In comparison, they may find that you have many of the traits and characteristics of an excellent potential consumer.  Or, it may tell the potential lender that you aren’t so good in the eyes of lending simply.  To come to this conclusion, there is a complex mathematical calculation that takes place rating you against what others in your similar situations in the past have done.

How Does It Work

While understanding the actual mathematical formula for this calculation can be quite difficult, you can still learn how it is calculated.  First, take the time to learn these facts.

1. In order to have a FICO score, you have to have at least one active account of some type or have had one in the past six months.
2. FICO scores are the most commonly used credit scores by lenders, but there are other scores out there, too.  In the US and throughout Canada, these are the most important scores to be concerned with.
3. FICO scores are actually developed using a very effective software tool that was made by the Fair Isaac Corporation. 
4. This software is used by TransUnion, Equifax and Experian, the three main credit reporting agency, to determine what your score is using the information within your credit report through those agencies.
5. The FICO score is then provided to the potential lender requesting it through the credit reporting agency.

What Makes Up That Number?

In order for you to control your FICO score, you should know what makes the most difference when calculating the number.  Different aspects of your credit report are used.  Here’s the percentage of importance of those aspects.

1. Your payment history:  This makes up 35% of your credit score.
2. Amounts owed:  The amount you owe to lenders amounts to 30% of your credit score.
3. Length of credit history:  15% of your credit score is based on how long you’ve had credit.
4. New credit:  This accounts for 10% of your credit score.
5. Types of credit in use:  10% of your credit score.

Your FICO score ranges based on these factors.  Plus or minus, up or down, your score will come within a range of 300 to 850, with the higher the number representing the lesser risk you are (higher is better.)  Yet another factor to know about your FICO score is that there isn’t a set standard for what is good enough for all lenders.  To some lenders, 500 may be acceptable while to others, nothing less than 600 is.  That is determined by the individual lender.