Credit Information

Who is FICO?

In 1956, Bill Fair and Earl Isaac discovered that, with enough specific data, they could predict outcome by calculating probable risk.

Fast forward to 2000 and firm of Fair, Isaac & Company, who now specialize in computer programs that predict how individuals will perform in the future based on past behavior, specifically using information from credit reports to calculate FICO (an acronym for Fair, Isaac & Company) scores. Here's what you need to know.

What is a FICO score?

A FICO, or credit score is a computer-generated numerical grade that predicts a lender's risk in doing business with you. You FICO can change from day to day depending on what information shows up in your credit report.

Who uses FICO scores?

Any company or individual that issues mortgage loans, home-equity loans, car loans, insurance policies, or healthcare services (even the IRS) bases much of its lending decisions and terms on the applicant's FICO score.

Who determines my FICO score?

FICO scores are determined by computers and released through the three credit bureaus to their subscribing members. At Experian, the scores are called Experian/Fair, Isaac; at Equifax, they are called Beacon scores; at Trans Union, they are called Emperica scores.

What is my FICO score based on?

Scoring is based on things like time on the job, the time you've lived at your current address, plus about 30 other factors, none of which are your income or assets:

Your payment history. Do you make your payments on time? Have you had accounts turned over to collection? FICO deducts points for bad behavior, and gives points for maintaining a good payment history.

Your outstanding debt. FICO is very interested in the number of balances you have currently, the average of all balances, and the relationship between the total balance and the total credit limit. Carrying too much credit lowers your score even if some of your accounts have zero balances, but FICO doesn't like to see you close to or at your limits, either.

Your credit history. FICO looks at how long you've had those accounts, the total number of inquiries, and if you have opened new accounts. It is highly concerned about inquiries and accounts less than 12 months old.

The types of credit you use. FICO is very interested in the diversity of the credit you use. It looks to see if you use department store or bankcards, debit or credit cards, travel and entertainment cards, personal finance companies, and installment loans.

Negative information. Bankruptcies, late payments, collections, late fees, too many credit lines with maximum available funds borrowed, too little credit history (less than five credit lines in the past two years), and too many credit report inquiries are considered negatives.

What is a good FICO score?

Only a lender or creditor can pull a FICO score, so you will need to go through one of them to take a peek at yours. Some lenders, however, will refuse. There is no law requiring them to release the score, but the law does not forbid it, either.

How can I improve my FICO score?

Correct errors in your credit report. Request a copy of your credit report from one of the big three bureaus each year. Instructions will be included on how to correct misinformation. Keep inquiries to a minimum. Moving balances from one credit card to another and applying for new lines of credit is deadly for your FICO score. Think twice about any move that will trigger a new inquiry into your credit file.

Close unnecessary accounts. The less available credit you have, the higher your FICO score. Remember, closing an account shows up as a positive on your credit report provided it was reported as "closed at the request of customer."

Get debt free. Pay off your credit card balances. Use credit sparingly and conservatively. To improve your FICO score, never allow balances to exceed 50 percent of available credit.

Pay your bills on time. The means everything, even your rent, mortgage and utilities.

Clear public records. If your credit report shows collections, liens, and judgments, take care of them and then follow up to make sure full payment is reflected on your credit report.

Use automatic bill pay. Take advantage of internet sites that provide direct bill pay. This service is worth its weight in gold and will improve credit scores by making payments on time! Your current bank or credit union may offer this service free of charge or for a small fee.

Contact me via email. To obtain addresses, phone numbers and websites of the major credit bureaus simply drop me an email.