A FICO score is a credit score developed by Fair Isaac & Co. Credit
scoring is a method of determining the likelihood that credit users will
pay their bills. Fair, Isaac began its pioneering work with credit scoring
in the late 1950s and, since then, scoring has become widely accepted by
lenders as a reliable means of credit evaluation. A credit score attempts
to condense a borrowers credit history into a single number. Fair, Isaac & Co.
and the credit bureaus do not reveal how these scores are computed. The Federal
Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical tables
that assign points for different pieces of information which best predict
future credit performance. Developing these models involves studying how
thousands, even millions, of people have used credit. Score-model developers
find predictive factors in the data that have proven to indicate future credit
performance. Models can be developed from different sources of data. Credit-bureau
models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering numerous factors
such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Length of time at present residence
- Employment history
- Negative credit information such as bankruptcies, charge-offs, collections,
etc.
There are really three FICO scores computed by data provided by each of
the three bureaus––Experian, Trans Union and Equifax. Some lenders
use one of these three scores, while other lenders may use the middle score.
Frequently Asked Questions (FAQs)
How can I increase my score? While it is difficult to increase your
score over the short run, here are some tips to increase your score over
a period of time.
- Pay your bills on time. Late payments and collections can have a serious
impact on your score.
- Do not apply for credit frequently. Having a large number of inquiries
on your credit report can worsen your score.
- Reduce your credit-card balances. If you are "maxed" out on your credit
cards, this will affect your credit score negatively.
- If you have limited credit, obtain additional credit. Not having sufficient
credit can negatively impact your score.
What if there is an error on my credit report? If you see an error
on your report, report it to the credit bureau. The three major bureaus in
the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian
(1-888-397-3742) all have procedures for correcting information promptly.
Alternatively, your mortgage company may help you correct this problem as
well.
