FICO scores provide the best guide to future risk based solely on credit report data. The higher the score, the lower the risk. But no score can guarantee whether a specific individual will be a “good” or “bad” customer. While many lenders use FICO scores to help them make lending decisions, each lender has its own process, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your approval and interest rates.

The Fair, Isaac and Co (FICO) is the company whose risk-scoring models are most commonly used to generate scores. They have found that certain things predict how well people will pay their bills. The most important factors are:

  • Previous payment record. Do you pay your bills on time or late? Obviously, on-time is better and late is progressively worse depending on how late, how frequently, and how recently. The most important bill to pay on time is your mortgage. Renters get no credit for on-time monthly payments.
  • Current indebtedness. What are your credit limits and how much debt do you carry? Maxing out your credit limit is bad. Using credit only when it’s needed is the best practice. These first two factors drive 60 to 65 percent of the overall score.
  • New credit. Credit bureaus look at new credit or new accounts to determine if you can afford the added financial burden. The model presumes you cannot until you prove over time that you haven’t taken on more than you should and can make payments on time.
  • Applying for new credit. When you apply for credit, the prospective lender accesses your credit report, and the credit bureau notes the inquiry on your record. Too many inquiries make lenders wary. Someone seeking a lot of credit in a short time is more risky than someone not seeking credit often. The model doesn’t penalize you if you need an auto loan or a mortgage within a short time frame. However, your score will suffer if you shop around for the best credit card or personal loan by applying to several at the same time. When a credit card company pulls your record to make you a “pre-approved” credit offer, the model ignores those inquiries.
  • Types of credit used. The credit bureaus rate the types of debt you have. The types include mortgages, auto loans, personal loans, retail credit, and student loans. Mortgages and auto loans get a better rating because they show that you can handle the money-management peculiarities of obtaining and maintaining each. The other types of credit or loans are rated lower.

In order for a FICO® score to be calculated on your credit report, the report must contain at least one account that has been open for six months or longer. The report must also contain at least one account that has been updated in the past six months. This ensures that there is enough recent information in your report on which to base a score.

Depending on the credit reporting bureau, FICO scores are now at BEACON (Equifax), EMPIRICA (TransUnion) and the Experian/Fair, Isaac Risk Model. FICP scores are based on information in consumer credit reports maintained at one of these credit reporting agencies.

Credit Scores Breakdown

Here is how Fair, Isaac and Co. measures financial risk:

  • Types of Credit Use: 10%
  • New Credit: 10%
  • Length of Credit History: 15%
  • Amounts Owed: 30%
  • Payment History: 35%

Basically, for FICO scores – higher score equals better rating.