Making FICO Work For Me

Making FICO Work For Me

Everyone wants to have good credit. The problem is that most people don't understand how their credit score is calculated or how their day to day activities effect that calculation. You might even be surprised how few people actually even know what FICO even stands for. So lets try to play "fill in the blanks" and give you some useful information that you can put to work for you and your credit profile.

First a brief history lesson. Back in 1956 two gentlemen named Bill Fair and Earl Isaac came up with the idea to create a mathematical model that would predict a persons credit risk. It predicted the chances that an individual was going to be 90 days late on his or he bills sometime during the next 24 months. They would then charge lenders to use this model when granting loans or issuing credit. Their company was called Fair Isaac Corporation. In the mid 1990s lending giants Fannie Mae and Freddie Mac accepted the use of a FICO score as their standard and advised other smaller lenders to do the same. Well, that was pretty much " game over ". FICO had a lock on the lending market. What once started in a small apartment in California has now turned into a publicly traded company on the NYSE that has revenues over 600 million dollars. In 2008 Fair Isaac developed a newer more up to date "model" that would do a better predicting an individuals credit worthiness. It was released to the general public in early 2009 and also in 2009 Fair Isaac officially changed the name of their company to FICO. So there you have it.

Not to be completely taken out of the picture the three credit reporting bureaus Experian, Equifax, and TransUnion have attempted to develop their own scoring model to compete with FICO. Theirs is called Vantage. Their system came out about 7 years ago and still today it is not accepted by the major lenders. FICO still has a lock on the market. So for the purposes of this discussion the scoring model we are going to talk about is FICO.

There are several factors of your financial behavior that FICO looks at when it determines your score. Your payment history is only one part of the whole picture. Below you will find a list and next to each item you will see a percentage number. That number is the relative importance or weight that FICO places on that section of your overall credit history to determine your credit score. Let's take a look
Payment History 35%
Credit Usage 30%
Length History 15%
Credit Mix 10%
Inquiries 10%

Now let's talk about each one of those briefly so you understand what the categories mean.

Payment History:How do you pay your bills? Are they paid on time or are they paid late or maybe even not at all ? If your bills are paid on time each month you will score high in this category and you need to ! It makes up 35% of your total score. Late payments will count the most if they are recent and will hurt you less as time goes on. Late payments that are over 24 months old count less then late payments that are less then 24 months old. This gives the individual the ability to bring the credit score up over time by starting and then maintaining an on time payment history. As the old late payments pass beyond 24 months they will hurt the score less and less as the newer on time payments fill the page. What FICO is looking for is trends.


Credit Usage: How much total overall credit does a person have and what percentage of that overall credit are they using at any one time. Say you have 4 credit cards with a $1000 credit limit per card. That gives you a total available credit of $4000. Now,.....how much of that are you using or carrying as "revolving debt". Let's say if you total the amount owed on all of your cards it adds up to $3500. That means your using $3500 or your $4000 available or 87.5% of your total available credit. That is going to give you a very low score in this category and it carries 30% of your total score ! Keep your balances low. Try to never use more than 30% of your available credit or in this case $1200 of the $4000 that is available to you.

Paying your bills on time and keeping your credit card balances low tells FICO that your living within your means. They'll reward you with good scores in these two categories and when you add them together you quickly see they makes up a whooping 65% of your total credit score


Length History: In other words the age of the account. An account that you've paid on time each month for 48 months carries more weight than an account that you've paid on time each month for 2 months. Makes sense. Remember...older established accounts with good payment history are very valuable. Hang on to them, pay them on time and keep the balance at or below 30% of available credit .


Credit Mix: How is your credit spread out? Credit cards, store cards, auto loans, house mortgage, personal loans, etc.. Someone with a couple credit cards is going to score more points than someone with one. Major cards ( Visa, MC, AMX, Discover) are worth more points than store cards ( JC Penny, Sears, etc.) . So the bottom line for you is 2 to 4 credit cards. All majors and all with a good payment history. They can even be secured credit cards. They work fine for credit score purposes as long as they are paid on time and the balance is kept at 30% or less of total credit. Throw in an on time automobile loan and your going to score big in this category.


Inquiries: These are inquiries about your credit. Each time you have your credit pulled your credit score takes a tiny hit. So one inquiry isn't going to kill you. But you can bet the bank that 50 of them are going to hurt and there in lies the problem . Most people have no idea how many people check their credit every day for all sorts of things. Automobile insurance, Life Insurance, Home or renters insurance, Landlord, existing credit card companies, existing mortgage company, auto finance company, cell phone providers, that special offer on QVC, oops were you buying an airline ticket? ....and the list goes on and on. For each inquiry your looking at a drop in score of between 1 and 5 points depending on your profile. Now not all of those are going to count against you and hurt you. In the last revision of FICO 08 there is even a change made for mortgage shopping and auto shopping within a 45 day period. The obvious problem with that is not everyone lives in a perfect world. Many of us think about buying and do some passive looking over at least a couple months before we buy. If we've been talking to sales people either on line or in person you can bet your credit has been pulled a couple of times. Bottom line....this is an area that can cost you a lot of points quickly. So keep that in mind especially if your attempting to build good credit. The good news is that this is also an area where proper credit restoration and make a big difference and fast !

Ok, let's sum it up. Pay your bills on time. Keep 2 to 5 open major credit card accounts with balances below 30% of available credit. Especially keep older established accounts in good standing with low balances. Spread your credit as you can to include an auto loan or personal loan. Keep inquiries to a minimum. Also keep the opening of new credit accounts to a minimum if you can. Do those things and the FICO points system will become your friend.