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FICO Score

Though in reality there are many different ways to calculate the credit score of an individual, the most common method used by most lenders is known as FICO, which is an acronym for its creator, Fair Isaac and Company. The company is independent and came up with the FICO scoring software which is currently used by most banks, lenders, insurers, and other institutions who must be able to calculate someone's credit score. Currently, all three of the major credit bureaus (Experian, Equifax and TransUnion) work with FICO, though they do each have their own individual scoring methods as well. Equifax uses the Beacon system, TransUnion uses the Empirica system, and Experian has the Experian/Fair Isaac system. However, each of these individual systems are all based on the original FICO concept, as they had all worked together until the 1980's on this single system.

FICO scoring refers to the numeric system of rating credit reliability, often called credit score, devised by the Fair Isaac Company. There are five general areas of information considered in the creation of a FICO score. The first, payment history, makes up about 35% of a consumer's overall score. Information related to payments on credit cards, retail accounts, car loans and other installment type of purchases and mortgage payments are considered, especially in terms of whether or not payments are on time, or if payments are missed. Specific information about late payments regarding the amount of time by which they were late is also a factor, as is the number of accounts that have no late payments. In addition to this type of data, matters of public record are considered. These include liens, judgments, bankruptcies, and foreclosures.

The second set of information to be considered related to the amounts owed, with roughly 30% of the overall score coming from this area of assessment. The third area of consideration is the length of credit history. About 15% of the FICO score comes form this data. New credit makes up the fourth factor, being about 10% of the score. The final area of consideration has to do with types of credit used. Making up about 10% of the score, this area of consideration looks at all of the different credit account as a whole, preferring a well-rounded representation of the various credit possibilities.

For FICO scoring to be able to work on your credit report, your report must have a record of a minimum of one account that has been open for 6 months or more. Additionally, this report must also have at least one account that has been updated within the last six months. This makes certain that there is enough recent information in the credit report for a proper score to be produced.

Many lending institutions use FICO scores to aid them in making the decisions regarding whom will receive a loan, and who will not. Each lender uses FICO within their own individual strategy, including judging the risk they deem acceptable for a certain lending product. For this reason, there are no actual "cut-off" scores that are used by all lenders. However, it is naturally in your best interest to be certain that your score remains in your favor, as FICO will play a large role in determining your probability of receiving the loan.