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The term FICO
stands for Fair Isaac Company. This company has developed a
mathematical formula to determine how high of a risk you are as a
credit applicant. The formula is nothing short of complicated and
confusing!
We have done extensive research on
the scoring model and have learned: The FICO score is developed by taking
millions of people, their payment histories, balances, credit limits,
number of open accounts and the percentage that don't pay, then coming up
with several different averages to justify credit worthiness.
Unfortunately, your score really isn't your score. It's a score based on
the performance of millions of people. The score consists of up to 300
different characteristics which are then boiled down to 10 different score
cards. Each score card is a determining factor in being approved for
credit.
We understand the 10-card scoring system as well as the 300 encoded
characteristics that are used to develop the concluding model. Here is a
percentage breakdown of some factors the formula takes into consideration:
Payment history (35%).
The largest factor determined on your FICO score is your basic
payment history. The number of unpaid bills you have, any bills sent
to collection, bankruptcies etc... The more recent the problem, the
lower your score. In fact, even something as significant as a 30 day
late payment can have a tremendous negative impact on your score if
it occurred within the last few months.
Outstanding Debt (30%).
Are your cards maxed out? High balances or more precisely, balances
that are close to your credit limit can negatively effect your
score. Keep your balances below 50% of your limit or pay the cards
off altogether (if possible). If you have to choose between paying
$1000 on three cards or paying off one card with a $3000 balance,
pay off the one card.
Length of your credit history (15%).
How long have your accounts been open? The longer, the better.
Recent inquiries (10%).
Every time you apply for credit of any kind, you create an inquiry
on your credit report. Lots of Inquiries negatively affect your
score. Inquiries within the last six months are especially damaging.
Types of credit in use (10%).
How many and how much? Having loans from finance companies (Beneficial Finance, American General, etc.) can detract from your
score.
As you can see, raising your credit
score can be more complex than disputing the accuracy, validity, and
timeliness of a negative item on your credit report. Remember that
removing inaccurate and unverifiable information from your report will
increase your scores. But in order for you to benefit the most from your
score, you must take a look at your credit situation as a whole.
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