How is FICO Calculated?
If you possess credit, you also have a FICO score. However, the specifics of how this score is calculated remain shrouded in some mystery. The Fair Isaac Corporation, the brain behind FICO scores, has chosen to keep the inner workings of its formula confidential. Even if the formula were unveiled, it could change without notice, leaving consumers in the dark about the exact details.
Interestingly, FICO itself doesn’t directly generate the scores. Instead, it develops software utilized by major credit bureaus like Equifax, Experian, and TransUnion. These bureaus input data into the FICO model to generate unique credit scores for individuals.
The silver lining for consumers is that FICO has provided a general framework outlining the information considered and its corresponding weights in the scoring process.
Payment History
Your payment history reigns supreme in determining your FICO score. This aspect encompasses factors like timeliness of payments, outstanding balances, delinquencies, and any negative public records such as bankruptcies. In total, payment history constitutes a substantial 35% of your FICO score.
Your Debt vs. Your Credit
Coming in at 30%, your debt level plays a pivotal role in your FICO score. It includes the number and types of accounts with outstanding balances, alongside your credit utilization ratio. Interestingly, opening new accounts can impact this ratio positively if the available credit increases without accumulating additional debt.
Length of Credit History
Apart from payment history and debt, your credit history’s length constitutes 15% of your FICO score. This segment considers the duration accounts have been active and open. New immigrants and young adults often face lower scores due to shorter credit histories. The types of credit used contribute another 10% to the FICO scoring system.
In essence, diversifying your credit accounts, including credit cards, mortgages, and retail accounts, is more advantageous compared to having a limited variety.
New Credit Applications
The final 10% of your FICO score revolves around new credit applications, encompassing recent inquiries and account openings. Opening multiple accounts in a short time frame raises red flags and can lead to score reductions.
The Bottom Line
Reflecting on the essence of the FICO scoring formula, a key takeaway is the importance of timely bill payments and maintaining manageable debt levels. While other factors contribute to your score, avoiding pitfalls in payment history and debt load is fundamental to ensuring a healthy credit profile.
While the FICO score may seem enigmatic, understanding its core principles is beneficial. However, attempting to manipulate the system is ill-advised. At its core, your FICO score hinges largely on payment history and debt management.
Ultimately, the FICO score, although veiled in some secrecy, centers around responsible financial behaviors. By mastering the basics of timely payments and prudent debt management, individuals can navigate the credit scoring landscape with confidence.