FICO Score Meaning
So what is the FICO score meaning? FICO stands for Fair Isaac Corporation or company. Usually when a person talks about a FICO score they are talking about your credit. Credit scores are formulated based on a consumer’s personal financing information, and they’re used to measure a consumer’s risk of defaulting on a loan or missing a payment. Many factors go into calculating a credit score, and the FICO model is just one of many.
The most commonly used credit score model in the United States is the FICO model, which produces credit scores on a scale of 300 to 850 (worst to best). FICO was originally named Fair, Isaac, and Company when it was established in 1989, but changed to Fair Isaac Corporation in 2003, and finally to just FICO in 2009. Today, it is the predominant credit score program used by bankers and creditors.
What Makes up a FICO Score?
The actual formula for generating a FICO score is confidential, but we do know the basic ingredients of a score and relatively how much weight each component carries.
- For starters, your payment history determines about 35 percent of the FICO score. Payment histories include delinquency, instances in which the consumer declared bankruptcy or foreclosed on a home, instances of default, or any time the consumer was involved in settlements, judgments, liens, repossessions, etc. Payment history showcases how well you manage debt.
- Second, about 30 percent of the FICO score deals with how much actual debt you’ve acquired, also known as your debt burden. Your debt burden includes how many lines of credit you’ve opened, how many accounts you have, your debt-to-limit ratio, how much debt you owe in total, and how much money you’ve paid down on your loans.
- The length of your credit report, also called your “time in file,” is going to make up another 15 percent of your FICO score. Banks like customers who have established credit for long periods of time, so the older and longer your credit history, the better your score. FICO will base the “age” of your credit history either on the oldest account or on the average length of all your accounts.
- Another 10 percent of your FICO score is based on the types of credit you use, or in other words, what kind of loans you’ve taken out. Do you have a mortgage or an auto loan? How about an installment loan? Or maybe you have taken part in consumer refinance. Consumers who’ve successfully paid back or handled lots of different types of credit are more attractive to banks and creditors. So a credit report with plenty of breadth is going to boost your score.
- The remaining 10 percent of the FICO score is determined by inquiries made on your account. Any time a creditor wants to view your credit report, they file an inquiry. Hard inquiries include any time you apply for a credit card or a loan. Making a lot of hard inquiries can hurt your credit score, unless they are all made within 14 to 45 days. FICO knows you’re going to want to shop around for the best rates, so they account for this by considering all inquiries made within the aforementioned time frame as one inquiry. That way, looking around for the best rate won’t hurt your score too much. Additionally, hard inquiries into mortgage, auto, or student loans have a 30-day initial grace period in which they don’t affect your FICO score at all.
Soft inquiries, on the other hand, include any time a prospective employer asks to see your credit report, any time you request to see your own credit report, or any time companies view your credit report before sending you pre-approved cards in the mail. Soft inquiries are invisible to credit scoring systems.
All inquiries, whether hard or soft, stay on your credit report for two years, but the FICO scoring algorithm only takes them into account for one year. After that, they won’t affect your score. So don’t worry: if the number of hard inquiries on your report is hurting your score, FICO will forget about them as soon as twelve months have passed.
Can I Have More Than One Credit/FICO Score?
Yes. FICO is just one credit scoring model, but there are lots of others, sometimes known as FAKO scores. Some of these include the Plus Score from Experian, the Experian Scorex PLUS, the Equifax Credit Score, the Application Score, TransRisk, or ID Analytics Inc.’s Credit Optics Score.
Even within the FICO model, there are calculating variations. Generally, FICO gets its consumer information from the three major credit reporting agencies in America: Experian, Equifax, and TransUnion. But each of these agencies have slightly different records regarding each individual consumer. Experian, for example, may have a more detailed report of a consumer’s credit than TransUnion, so the FICO score generated from Experian’s information is going to differ from a FICO score generated by TransUnion’s.
The same is true of FICO scores generated by other credit reporting agencies. In the end, the score depends on the financial information available.
Good Credit = Good Rates
We at Low VA Rates want to bring all our customers into the know when it comes to credit. Though credit scores are important, we don’t think they should be the sole factor in determining whether or not a client is worthy of a loan. That’s why we, like the VA, require no minimum credit scores for VA loan approval. But having a good credit score makes life easier, and ensures you get the best rates you can on your mortgage. Knowing this, we want to help all veterans be in the best financial position possible. To learn more about maintaining good credit, give us a call at 855-223-0705.