Understanding FICO Scoring

Fair Isaac Corporation doesn't publicize its exact computations, but it does outline the factors that affect your FICO score. These are:

• Payment History: Whether or not you pay your bills on time is the most heavily weighted factor in your score. Recent delinquencies affect the number more severely than late payments did just three years ago, and 90-day past-dues are more serious than 60-day past dues.
• How Much You Owe: The FICO calculation considers how much you owe on revolving credit versus installment credit, as well as how much you owe in total. Carrying large balances on several different accounts will lead to a lower score. That's because this often indicates that you may be overextended. Low balances relative to available credit imply that you manage credit responsibly. This has a positive effect on your FICO score.
• Length of Your Credit History: All else being equal, a longer credit history generally means a higher FICO score.
• How Much New Credit You Have: Taking on more debt in a short period of time could indicate that you're struggling to make ends meet. Sudden increases in credit inquiries and new account openings will lower your FICO score.
• Types of Credit You Use: The FICO score also considers how you manage various types of credit together. These include credit cards, auto loans, mortgage loans, etc. Credit cards have a valid place in a healthy credit mix, if they're managed conservatively.

Not one, but three

In actuality, you have three different FICO scores. Differences arise for two reasons. First, as noted in Chapter 2, each credit bureau may have slightly different source information about you. Second, Fair Isaac provides each bureau with its own scoring formulation. The term 'FICO score' can refer to any one of the following:

• BEACON-associated with Equifax.
• Experian/Fair Isaac Risk Model-associated with Experian.
• FICO Risk Score, Classic-associated with TransUnion.

When based on the exact same source information, the three separate scoring methodologies yield similar results. In other words, assuming your credit information is accurate at all three agencies, there shouldn't be a significant variance from one score to another.