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What is FICO?
FICO: Fair Isaac Corporation. It is a publicly traded corporation that provides software that utilizes information in a credit report to calculate credit scores.
There are a number of different credit scores available, but FICO scores are used by over 90% of creditors in the United States.
FICO calculates 49 different credit scores. The different scores are designed to suit different needs. For example, the score used to assess if a consumer should be granted a $500 store credit card is different than the score used to decide whether a consumer should be granted a car loan. Each credit reporting bureau has its own method of calculating scores (although they are fairly similar to one another). The way scores are calculated is also updated frequently, so it doesn’t take long for the different scores to become available.
The basic FICO® credit score is the one most frequently used, especially by credit card companies. This is also the score that consumers see if they request a credit score.
This score ranges from 300 – 850, with 300 being high risk/poor rating, and 850 being low risk/excellent rating.
Credit Score Ranges
More specifically, the scores are grouped into ranges for Excellent, Good, Average, Poor, and Bad as follows:
720 – 850: Excellent
It is estimated that slightly less than 50% of the population has an excellent credit score. This is a group of people who have generally been at their current job (or current line of work) for more than 2 years. These people pay at least the minimum payments on their debts on time every month. These people generally carry a balance of less than 30% of their available revolving credit (i.e. credit cards), and they do not open new credit accounts frequently, or have many credit inquiries.
680 – 719: Good
This group contains approximately 15% of the population. These people may be doing almost everything right, but have a lower score because of one or more minor issues. Perhaps one of their credit cards has a high balance, or they were late on a payment in the last 2 years.
620 – 679: Average
It is interesting that this group is called average. About 65 – 80% of Americans have better credit scores than people in this group. Opening new credit accounts is often the cause of the downfall of this group. Perhaps these people like to save 15% off their first purchase at a department store, or they wish to take advantage of low introductory rates for balance transfers on credit cards. These people may have large debt loads from car loans or student loans. They may also have too many credit cards and/or have high balances on those cards. Being late or missing minimum payments may also contribute to these lower scores.
580 – 619: Poor
This group contains about 10% of Americans who are likely affected by a combination of the factors listed in the “Average” category. This group of people may have a difficult time obtaining credit for car loans and mortgages.
Below 580: Bad
This group is comprised of the bottom 10% of the population. This group is likely affected by a combination of the factors described in the “Average” group, plus a foreclosure or bankruptcy on their report. Most credit issues can be cleaned up over time, however, foreclosures and bankruptcies tend to damage credit scores for many years, if not permanently.
Specific Events that Reduce Credit Scores
Many extremely responsible people have credit scores that may not accurately reflect their credit worthiness. We may unwittingly do some of the following things that may ultimately hurt our credit scores:
Open new credit card accounts to transfer balances to lower rate cards
Close old accounts so that the average age of open accounts is less than 5 years
Apply for a few loans, hoping to shop around for the best rate
Open retail credit accounts to receive discounts
Keep overall credit balances low, but have one account with a high credit ratio
Close a credit card account before paying off the balance in full
Have many open credit accounts – even if they have zero or low balances
Not making payments on time: skipping a month, paying late, or paying less than the minimum monthly payment
Allowing a disputed charge to go to collections, rather than correcting it