What’s the score? Unlocking FICO’s numerical mysteries
Question: I recently moved here from abroad and was turned down for a rental because I have no FICO score. What is a FICO score, and how do I get one?
Answer: The FICO score was developed by Fair, Isaac and Co. in 1956. It is applied to virtually every loan or financial request and rates the credit worthiness of an applicant.
For the record:
12:00 a.m. Nov. 12, 2006 For The Record
Los Angeles Times Sunday November 12, 2006 Home Edition Main News Part A Page 2 National Desk 8 inches; 317 words Type of Material: Correction
Credit scores: The Rental Savvy column in the Nov. 5 Real Estate section contained some errors about credit scores. The column said the FICO score was developed by Fair, Isaac and Co. in 1956. The company, which changed its name in 2003 to Fair Isaac Corp., developed the score in 1989. Craig Watts was identified as a FICO spokesman; he is a Fair Isaac spokesman. The article reported that Watts said that a person might have a poor score because foreign banks don’t post credit histories. Watts actually said that U.S. banks and credit firms do not accept credit histories from other countries. He further said that among reasons a person might have no FICO score is that he or she recently immigrated to this country and had not yet established accounts with U.S. lenders...CX: The article said scores are reassessed monthly; in fact, scores are calculated on demand. It also said consumers whose credit was just run were entitled to a free copy of the report. Consumers are entitled to a free report when a creditor denies them credit. And, as stated in the article, federal law allows consumers a free report once a year.The article said 30% of the score is based on the ratio of debt to credit limit and 20% on the number of credit cards in use. The score is based 30% on the amount of outstanding debt, of which credit utilization is only one of six factors, and 20% on the number of new accounts opened and applied for recently; the mix of credit types on the report; and the quality of any loans, with loans from finance companies lowering the tally...CX: The article further said owing more than 70% of available credit is a red flag to scorekeepers. Fair Isaac does not consider 70% a key threshold, Watts said, adding that lower utilization is better for one’s credit score.
Generally, a FICO score falls between 300 and 850. A score below 600 indicates a bad credit risk, while above 713 is considered good credit.
Until recently, FICO scores didn’t even appear on most rental credit reports. Instead, a list of the applicant’s credit activity was provided, which wasn’t easy for some landlords to read and evaluate. Now that FICO scores are reported to landlords, renters may be concerned they are being evaluated based on a single number.
Why does a FICO score matter? The score, calculated using a complex statistical model, is the grown-up version of a report card. The higher the grade, the better the odds of financial success. To have a zero or nonexistent score could indicate failure to make the grade as a credit risk. Among the reasons a person might have a low or nonexistent score, said FICO spokesman Craig Watts, is that some creditors, such as foreign banks, don’t post credit histories.
On the plus side, since the score is reassessed monthly, you can always improve it.
The first thing to do is get a copy of your credit report. If your credit was just run, you are entitled to a free copy, upon request.
You may also request a report online or by phone, a right granted annually to consumers under federal law. Watch out, though, since the only truly free one is available at www.annualcreditreport.com, or (877) 322-8228. Other sites that advertise free reports often charge a fee after 30 days for subscribing to their credit monitoring service.
Your report lists specific information, including credit cards you have opened and closed, balance activity and any loans.
Although the report through Annual Credit Report is free, it only provides lines of credit data. Obtaining the actual FICO score number will cost around $7.
Once you have your credit report in hand, you can get a handle on what others are seeing. Scan carefully for errors, especially checking that all account balances are accurate and that any negative items, such as late payments, are correct.
What makes up your FICO score? The actual number is determined by five credit aspects, with 35% attributed simply to paying bills on time. An additional 30% is based on the ratio of debt to credit limit, with consumers stretched too thin paying the price with a lower score. Overuse of credit is measured by how much you can borrow and how much you’ve racked up as debt. Owing more than 70% of available credit is a red flag to scorekeepers.
An additional 20% of the score is influenced by the number of credit cards in use. Using too many or accepting too many credit offers can reduce the score. The quality of any loans is also considered, with high-interest finance lenders lowering the tally. Length of credit history accounts for the last 15%.
Finally, how do you get your FICO score up to grade? By playing the credit game wisely.
If you have no credit established at all, large chain stores offer charge cards for shoppers, requiring little or no preexisting credit. Pay bills on time, especially since penalty rates for new borrowers can be steep. When the credit offers come streaming in, don’t sign on for more debt.
By knowing what factors affect your score, you can get the numbers running in your favor and before you know it; your credit will be in top-notch shape.
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