Understanding the FICO Score Model

Acquiring good credit is a balancing act. If you have too much debt then your scores will suffer. If you have no credit then your credit scores will suffer as well. There are 5 factors that determine you’re over all creditworthiness. Any of these five factors will dictate your score either in a positive way or a negative way.

Your credit report will show all 5 of these factors in what is called a tri-merge report. This report is produced by each of the National Credit Bureaus. TransUnion, Equifax and Experian all basically use the Fair Isaac Scoring Model to determine your score in this report. Most banks use this risk model for determining approvals.  Now there are other score models out there, but FICO is pretty much the standard with most creditors. Keep in mind that each bureau will have a different credit score because each bureau is reported to independent of each other.

FICO Score Model

•    Payment history 35%
•    Amounts owed 30%
•    Length of credit history 15%
•    New credit 10%
•    Types of credit used 10%

Based on the model above you can see than your credit scores are determined by credit history and your credit utilization. This basically means you need credit cards with a low balance and a good payment history.

If you don’t have any credit cards or loans on your credit report then you are considered a higher risk in the eyes of most creditors. Having no credit may result in no credit scores or low credit scores if you have some past credit history.

The whole point of a credit score is to determine your personal credit risk. The higher your credit score the lower your risk is to creditors.

In order to have good credit you must have credit reporting to all 3 national credit bureaus. This is typically done in the form of a credit card, installment loan, or a mortgage.

Fair Isaac’s score model will look at your length of history which accounts for 15% of your overall credit score. This model also looks at the types of credit used. There should be a mix of credit like listed above which accounts for 10% of your credit score.

You can see how different factors in the Score Model will affect your overall FICO score aka (Credit Score).

Remember too much credit owed which accounts for 30% of your overall credit score will affect you greatly. A late payment which accounts for 35% of your credit score is a score killer as well.

While working on keeping your credit squeaky clean you to can reference this score model as a tool to keep your creditworthiness in check.

Author: Mike Clover


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Disclaimer: This information has been compiled and provided by CreditScoreQuick.com as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.