What's In Your Score
FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages below reflect how important each of the categories is in determining your score.
Payment history 35%
Amounts owed 30%
Length of credit history 15%
New credit 10%
Types of credit 10%
These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.
Payment History 35%
- Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
- Severity of delinquency (how long past due)
- Amount past due on delinquent accounts or collection items
- Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
- Number of past due items on file
- Number of accounts paid as agreed
Amounts Owed 30%
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Length of Credit History 15%
- Time since accounts opened
- Time since accounts opened, by specific type of account
- Time since account activity
New Credit 10%
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problems
Types of Credit Used 10%
- Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.
Please note that:
- A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.
- The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.
- Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
Your score considers both positive and negative information in your credit report.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
Frequently Asked Questions
Q: I've heard that having too many open revolving accounts hurts a Fico Score. Should I tell my clients to close some of their revolving accounts to improve their score?
A: While it is true that there is a deduction code that reads "too many open revolving charge cards" this is what we refer to as a bottom of the barrel reason codes.
When the Fico score is provided it comes accompanied by the 4 category codes where the borrower lost the most points. There may be deductions made in many categories, but only the 4 that accounted for the most points lost will be displayed. And there can be an enormous number of points lost to the reason code listed first, and only a few points lost to the reason code listed last.
The code for too many open bank or national revolving accounts is reason code # 4, but deductions can be made under code # 5 and code # 28 as well.
These reason codes usually appear in those "top 4" when the Fico score is in the upper 700s and into the 800's. These borrowers have nearly perfect scores and have lost very few points to the reason codes provided. In fact, sometimes less than 4 reasons are provided because their file was in such good shape that there weren't deductions made beyond the 1,2 or 3 codes provided.
Yes, having too many open revolving charge cards does cause a subtraction from the score. However, it is minimal. To a person who has a 775, they might improve their file a few points by closing unused cards, and keeping only 1 or 2 major revolving charge cards open. But for the average consumer, the biggest loss of points occurs in the codes devoted to the ratio of the balance to the credit limits, reason code #10. Under this code, a calculation is made on each individual trade, and then collectively as a group. Closing an open revolving charge card, especially one with a balance, will most likely create a much larger loss under the "ratios" category than the gain that would be seen under the "too many" category.
The final word...
Do not advise consumers to close their revolving charge cards!
Q. Can you explain briefly, what is a Fico Score?
First let me explain that FICO is a company that has been around for many decades. FICO is an acronym for Fair, Isaac Corporation. This company wrote a computer program that analyzes the contents of credit files looking for patterns that indicate the individual may be at risk for future delinquency. They wrote this software program after analyzing 1.5 million credit files, both before and after credit was granted.
They then sold or leased the program to each of the national credit bureaus. The three bureaus resell the score to their subscribers under a product name of their choosing. Equifax sells the score as Beacon, Trans Union sells the score as Empirica and Experian sells the score as the Fair Isaac Risk Model.
Classic Fico is a calculation that is made based on all of the credit related data included in an individual's credit file at a particular bureau. The calculation results in a 3 digit number ranging from 380 to 840 that indicates the probability that the borrower will become delinquent in the next 12 months, on any account granted at that particular moment in time. It is NOT an assessment of how much trouble someone has been in, instead it is an assessment of how likely they will be to get into trouble in the near future. Even people with perfect credit histories can have low scores because of patterns that reveal risky behavior.
Q. Can you please explain to me how inquiries are handled within FICO scoring? I have heard that mortgage company inquires don't count into a FICO scoring.
What you heard was both right and wrong. One of the various "tweaks" that Fair Isaac has made to their scoring software over the years has involved how inquiries from various industries are incorporated into the FICO score.
Currently, inquires made in the mortgage industry and in the automotive industry, that were made within the last 30 days are ignored in calculating the score for the report that is being requested at this particular moment.
Inquiries that are older than 30 days are grouped into two-week increments and defined as a single inquiry. So the maximum number of inquires that you can have from the mortgage industry in any 30-day period preceding the most recent 30 days is 2.
So it is true they "don't count". But this applies only to the last 30 days worth of inquiries. For those older than 30 days, they "count" but they are also handled in groups rather than individually. Inquiries from other industries, such as banking, credit card, etc, are counted individually, as they occur.
Q. I have a borrower with seemingly perfect credit, there are no late payments, no collections and no judgments. His credit scores are in the low 600s. I cannot figure out why their credit scores are so low. How can this be?
The answer lies in the definition of what a FICO score is. FICO scoring is not a reflection of how bad the credit history has been. Instead, it is a an assessment of how likely your borrower will be to get into trouble in the future, based on patterns exhibited in their current and past credit history. Although previous credit problems are taken into consideration, only 1/3 of the borrower's score comes from this category. Another 1/3 of the score depends on the category of credit usage. This category includes deductions made based on the ratio of credit limits to balances due on credit cards. It also includes what types of credit are present; points can be lost for having too many of one type of credit and/or not enough of another type of credit. So while it is certainly possible for the borrower to have no delinquencies appearing in their credit file and still have low scores, resulting from deductions made in other categories.
Q. Let's talk the nitty gritty. What exactly does the Fico software use in its calculations?
There are 5 categories that the program evaluates. 35% of the score is derived from looking at the payment history. 30% of the score is derived from looking at the current level of indebtedness. Another 15% of the score comes from Amount of time credit has been in use. The remaining 20% is divided equally between Pursuit of new credit, and Types of credit experiences.
Within the credit history, if there are delinquencies present, they are broken into time frames and into categories of severity. Several questions are answered during this section of the evaluation. How long ago was the last time a delinquency was reported? How serious was the most serious delinquency and when did that occur? What is the frequency of the delinquency that is present? The amount of money involved is ignored in this set of calculations. So it's important to understand that a 60-day delinquency for 10.00 is just as serious as a 60-day delinquency for 1000.00. Obviously if the credit history is perfect, there are no deductions made in this category.
The second category is current level of indebtedness. This tracks how much debt you are currently in as a ratio between the balance on each account, against the original loan amount or credit limit. Although Installment loans are included, their impact is not as heavy as the results from the calculations on the revolving accounts. There are two separate ratios used on the revolving debt. I'm not sure if the same applies to installment loans. The first is a calculation on each individual trade, and the second calculation adds up all of the balances on revolving accounts and all of the credit limits on those accounts and establishes a second ratio.
The third category addresses the length of the credit history as an average. Adding new accounts causes the average age to go down, temporarily reducing the score.
The fourth category is pursuit of new credit, which is reflected in the inquiries that are being made into the file. This category creates the most confusion for consumers because there are so many different influences on the resulting deductions. If the file is "young" the inquires will have a heavier impact, if the file is "old" the inquiries will have less of an impact. Inquiries from different industries have different impacts. There is a buffer of 30 days on inquiries made from the mortgage industry and the auto industry allowing the consumer to rack up multiple inquiries from those industries without adversely affecting their score. Factors present in the other categories like payment history also affect the impact of inquiries.
The fifth and final category is what types of credit are present in the file. If a file doesn't have a major revolving credit card, like Visa or MasterCard this results in a deduction in this category, if there are too many there is a deduction. Optimally, there should be 2 major revolving charge cards. Additionally, age of the file affects this category as well. A file that was established years ago may be able to carry more open revolving charge cards and not see a deduction in this category.
Q. I've seen files with no scores, I can understand this if the file contains no credit data, but there are some that do contain credit data that don't generate a score. Why is this?
There are minimum requirements that a file must meet before any calculations can be made. First, there must be no trades that have reported one or more of the account holders as deceased. Secondly there has to be at least one trade line that has been open at least 6 months. And there has to be at least one trade line that has reported to the bureau in the last 6 months, it can be the same trade or a different trade than the one used to meet the second condition.
This can mean that a file that has 40 or 50 trades can have no score, if all of the accounts stopped updating more than 6 months ago.
Q. I pulled a report today on a mortgage applicant and the borrower had scores in the low 600's. The borrower went to the websites of each of the credit bureaus and purchased their reports along with the scores. However, the borrower called back to say that the scores the bureaus gave him were much higher, in some cases as much as 75-100 points. How is this possible?
It is quite possible because the scores sold to consumers on 2 of the 3 credit bureau websites are not FICO scores and the disclaimer stating this is not well displayed. Furthermore the one bureau that does include a true FICO score to the consumer doesn't explain that there are 5 different versions of FICO available, and which one they are providing.
When a business signs up to use the FICO score, that business chooses the version appropriate to their industry. There is a general version, and versions specifically designed fro the Auto industry, the Credit Card industry, the installment loan industry, and the final version is specific to the Personal Finance industry.
All we know is that it is most definitely not the version used in the mortgage industry, I've had some interesting phone calls that have accused me of fudging scores so that a borrower gets a bad rate, and must pay more points. So which version do they provide? An educated guess would be that they provide the credit card version. It seems logical to think that the credit card industry pulls more credit files than the auto industry or the installment loan industry leading to the assumption that the majority of consumers asking for their reports and scores are being generated from credit card applications. However, we do not know this as a fact.
To further complicate the issues the bureaus are also actively selling NEXTGENFico scoring to some of their subscribers. While this score does the same thing as Classic FICO, the range is larger, the top score for that model is 950.
