A FICO® score is a way of measuring an individual's creditworthiness without requiring access to their income history or employment status. Originally developed by the Fair Isaac Corporation, this number is now widely used by major credit reporting agencies. Credit card providers and banks will use a customer's score to determine credit limits and interest rates.
Before a credit score can be calculated, at least one credit account must be open and active for a minimum of six months. While this provides the bare minimum of information, lenders prefer to see a minimum of three or four credit accounts stretching back at least 12 months. This is especially true for banks providing large lines of credit and mortgages.
The standard method for calculating a FICO® score involves a number of weighted factors:
- 35% Punctuality
- 30% Ratio of debt being used to total available credit
- 15% Length of payment history
- 10% Ratio of installment to revolving debt
- 10% Credit currently applied for, number of credit checks, etc
A FICO® score ranges on a scale from approximately 300 to 850. The median score is around 720; scores above 725 are considered "good" while scores below 600 are considered "bad." Credit reporting agencies may report a different credit score for the same individual, typically because different reporting agencies have access to different parts of an individual's credit history; they use this information to calculate the number rather than using the actual credit score. In some cases, a reporting agency may also provide an estimated score to consumers rather than the actual score used by lenders.
Certain factors can have an especially large impact on the score. Unsatisfied court judgments and unpaid collections are especially damaging. Individuals clearing such items from their credit history should be aware that paying off a collection or judgment may, in the short term, actually decrease their credit score as it makes the activity on the account more recent. Individuals with too many consumer finance company accounts may also find their scores negatively affected, as such accounts are widely viewed as being debt traps from which consumers have difficulty escaping.
In many countries, including the United States and Canada, credit reporting agencies are required to give consumers periodic free access to their credit history and FICO® score.