Credit Score - FICO Ratings Explained

Improving Your Credit Score

A credit score is a number that represents the credit worthiness of an individual and the likelihood of that person paying his or her debts. Many people would like to improve their credit rating scores. Any person can get a credit report from the three major credit reporting agencies for free annually, plus they can get a copy of their FICO score, which does have a fee. FICO is an acronym for the term Fair Isaac Corporation Score. The NextGen 2.0 model is a change that credit reporting agencies are now using, which made some changes in the FICO scoring criteria.

With the drop in the credit rating of the United States, many economists are predicting credit card interest rates, as well as, fixed rates for new loans will all be increasing, so the wise person will eliminate debt as soon as possible.

FICO Standard Scores

Excellent - 750-840

Good - 660-749

Fair - 620-659

Poor - 340-619

FICO

source creditscorechart
source creditscorechart

FICO Criteria

The exact formulas for calculating credit scores are secret, however, FICO has disclosed some components:

  • The payment history makes up 35% of the score; therefore, if you're late making payments on bills, such as a mortgage or credit card this can cause your FICO score to drop. Conversely paying your bills on time improves your score.
  • Credit utilization comprises 30% of your score. They look at the ratio of current revolving debt (such as credit card balances) to the total available revolving debt or credit limit. In order to improve the FICO score, pay off revolving debt in order to lower the credit utilization ratio. In addition, applications for and receiving the credit limit increase can also drive down the utilization ratio. Closing existing revolving accounts will typically adversely affect the ratio, which will have a negative impact on your FICO credit score.
  • The length of your credit history accounts for 15% of your credit score; therefore, as the credit history ages this will have a positive impact on your FICO credit rating.
  • The type of credit used accounts for 10% of your score. Your score can benefit from managing different types of credit, (i.e. installment, revolving, consumer finance and mortgage).

Another 10% is based on recent searches for credit. Shopping for a mortgage or auto loan over a short period of time will probably not decrease your score as a result of these inquiries.

Numerous inquiries when a consumer is seeking new credit can hurt your scores, particularly with credit cards. All credit inquiries are recorded and displayed on your credit report for a period of time. However, an individual doing self-checks, an inquiry by an employer for employee verification or companies initiating pre-screened offers of credit or insurance do not impact your credit score.


There are a couple of other special circumstances that can negatively your FICO score. Money that is owed because of a court judgment or a tax lien does carry an additional negative penalty, particularly when recent. Having one or more newly opened consumer finance credit accounts may also have a negative impact.

Evaluate Credit Score

source firstratingjournal
source firstratingjournal

Finding Your Credit Rating

FICO scores are between 300 and 850, and 60% of the scores are right between 650 and 799 with the median score of 723.

The three major credit agencies utilize the score generated with their data differently:

  • Experian: FICO Advanced Risk Score
  • Equifax: Pinnacle
  • TransUnion: Precision

Fair Isaac Company has developed a new method called 'NextGen FICO 2.0', which they say addresses important credit trends by improving score accuracy and maintaining predictive power. Theoretically these changes will benefit consumers and lenders by allowing easier scoring, updated treatment of inquiries and a more consumer friendly content; this method will be utilized by all three major credit agencies. The new model is similar to the FICO scoring but the range is between 150 and 950. The Fair Isaac Company estimates the new model will provide a 5 to 15% score list for non-prime consumers.

It has a more forgiving algorithm from the previous scoring model, as they acknowledge that savvy consumers shop around for the best rates when obtaining credit, therefore, there won’t be a negative impact when shopping for new credit that lowers your credit score. The younger population often suffers under FICO since they don't have a credit history, so they're not “scoreable”. The NextGen has lowered the minimum scoring criteria to be able to score a larger population, which will allow particularly young adults to be able to use their score and receive new credit. Under the old FICO guidelines it took six months to receive a credit score and now only one line will need to be open for three months to receive a score. These changes are minor but they will result in 2% of the population being able to receive a credit score.

How to Raise Your Credit Score

Now that you are well aware of how a credit rating is determined, it is important to do the things necessary to improve your score. Get a copy of all three credit reports and your FICO credit score. This will clearly show you what you need to pay off first.

If you are paying on a collection account, there will be a negative impact on your score and this is the first thing you want to pay off. Of course, delinquent accounts are listed on your credit report in a column called "Past Due". If you see anything in this column on your credit report, pay them off absolutely as soon as possible.

Charge-offs and liens within the past 24 months will severely damage your credit so it's very important to pay these off also. However, if these are older than 24 months, it does not negatively impact your credit. Prioritize and pay your past due balances first, then pay your collection agencies when they agreed to remove all references to credit bureaus.

It is possible to request a good faith adjustment from your creditor with whom you have late payments that removes them from your credit report. Persistence pays off if they refuse to remove these late payments. Remind them that you had been at a good customer and would deeply appreciate their help. Most creditors receive calls at a call center, so if the representative you're speaking with refuses to make a courtesy adjustment, call back and try again with someone else as your persistence and politeness can often pay off.

Make sure your creditors report your credit limits to credit bureaus, because if no credit limit is reported the software used by the credit agencies often show your account has “maxed out.” As an example if you have a $10,000 credit card limit, which doesn't show on your credit report your score can be damaged as severely as if you are carrying this whole balance. Ideally, you want to keep money owed under 70% of your total credit limit at 50% is even better and 30% even better.

Generally do not close your credit cards, as this will hurt your credit score ratings. For example, if you have credit card debt of $15,000 and your total credit is $30,000, you are using 50% of your total credit. If you close a card with a $10,000 limit, you change your ratio to using 66% of your credit, which will hurt your credit score. If you have more than six department store credit cards, you can close the newest account but don't close the rest.

Keep your old credit cards current even if you're not using them anymore. Use them once or twice a year so the bank doesn't close them as this positively affects your long-term credit rating.

Establishing New Credit

If you don't have a credit card, you should get one to build your credit but if your credit is not adequate, try getting a secured card, which means giving a bank typically $500 for a VISA card. Then use the card each month and pay it off in full. It is not necessary to carry a balance. Another excellent way to improve your credit is to get an installment loan, which can consist of personal loans, automobile loans, mortgages and student loans. Be very careful when getting a loan that the payment is an amount that you can easily afford.

Bank secured credit cards can help you improve your credit score

Great Credit Can be Yours

source housingstorm
source housingstorm

Summary

I know many people are in bad shape financially and having to resort use of credit cards for groceries. The main thing is to at least make a payment every month. If you are in the position where you want to improve you credit score follow the steps outlined above. I hope you area a better understanding of the FICO rating system with the new changes. Your credit is something that you need to treasure because once you ruin your credit it is a long process to regain your credit score.

Credit Questions

The copyright to this article is owned by Pamela Oglesby. Permission to republish this article in print or online must be granted by the author in writing.

More by this Author


Comments 17 comments

tlpoague profile image

tlpoague 5 years ago from USA

Terrific information! I found when we were applying for a business loan that we didn't have credit. (No bad credit, good credit or any credit.) We are now in the process of building our credit to get approved for our small business. Thanks for sharing this helpful information.


Pamela99 profile image

Pamela99 5 years ago from United States Author

tlpoague, I'm glad this hub was helpful for you. Thanks for your comments.


breakfastpop profile image

breakfastpop 5 years ago

Very wise advice. Now if you could get the government to understand this hub, we might have something. Up and useful.


Cloverleaf profile image

Cloverleaf 5 years ago from Calgary, AB, Canada

Pamela, debt is such a problem for so many households these days, and it seems to be getting worse. One of the biggest challenges seems to be not knowing where to start to make things better...so how kind of you for putting all this useful information together! I didn't know that closing your credit card accounts could actually harm your credit score.

Brilliant hub, up and useful!


anglnwu profile image

anglnwu 5 years ago

Very useful information. Good credit score is even more crucial now, with the down-turn in economy. Rated up. Sorry, was away and didn't manage to get my vote for you in time in the facebook contest.


Pamela99 profile image

Pamela99 5 years ago from United States Author

BPOP, Never a truer statement has been said. Thanks so much for your comments.

Cloverleaf, I'm glad the hub was helpful to you. I appreciate your comments.

Anginwu, Thanks so much for your comments. I won the contest that I asked you to vote in regardless, just not the last one.


dallas93444 profile image

dallas93444 5 years ago from Bakersfield, CA

Thanks for sharing timely, good information.


prasetio30 profile image

prasetio30 5 years ago from malang-indonesia

This hub show your talent in writing in various topic. I am glad to know this from you, Pam. I always amaze me. Thank you very much. Rated up!

Prasetio


Pamela99 profile image

Pamela99 5 years ago from United States Author

dallas, I'm glad you liked the hub and I appreciate your comments.

prasetio, I am glad you like this hub. Thank you so much for your comments.


prasetio30 profile image

prasetio30 5 years ago from malang-indonesia

Sorry I have a mistake with my comment above. I mean, "you always amaze me". God bless you!


Pamela99 profile image

Pamela99 5 years ago from United States Author

prasetio, No problem. I knew what you meant. Thanks so much.


always exploring profile image

always exploring 5 years ago from Southern Illinois

Very well written Hub with good advice. Thank you for sharing.


Pamela99 profile image

Pamela99 5 years ago from United States Author

always exploring, Thank you for your comments.


moneycop profile image

moneycop 5 years ago from JABALPUR

free from any kind of credit...i never take any nor allow....this is very useful yet bcoz people are habitual to it...so must b guided


Pamela99 profile image

Pamela99 5 years ago from United States Author

moneycop, It takes determination not to get into debt but I believe it is helpful to understand how they arrive at your FICO score. Thanks for your comment.


Petra Vlah profile image

Petra Vlah 5 years ago from Los Angeles

Great information Pam, thank you. It has always puzzeled me the 840 as being perfect credit score. Does FICO believes only God is perfect at 100?!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Petra, Good point! Thanks for your comments.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.


    Click to Rate This Article
    working