Fico in Plain English
Considering how critical one’s FICO score is to our lives today, it’s amazing how little people know about what exactly makes up this all-important figure. We will describe some of these facts in the following.
Firstly, the FICO score ranges from 300 to 850. The higher your score the better risk creditors will consider you to be. Although it is not totally uncommon for people to score above 800 it is extremely unlikely someone would have a score in the 300’s. A score in the 500’s is considered to be very poor, typically indicating a bankruptcy or other very serious credit problems.
The FICO score is comprised of five factors:
- Payment history, this makes up 35% of the score
- Amount owed, this makes up 30% of the score
- Length of credit history, this makes up 15% of the score
- New Credit, this makes up 10% of the score
- And, Types of credit used, which also makes up 10% of the score
Thing that do not affect your score are:
Private information having nothing to do with actual payment history such as race, religion, sex, marital status, age, salary, location of primary residence, child and/or family support or rental payments.
All 3 of the credit reporting agencies, Experian, Equifax and Trans Union calculate a FICO score on every individual applies for and/or receives credit. The 3 scores will most often be different but only slightly. The reason for this is that they do not all receive the exact same information on any given consumer from lending institutions. The higher these scores are for you the greater benefit you will derive on credit you receive.
Lets take a look at an example: Person A has a FICO score of 760 and Person B has a score of 640. They both apply for a mortgage loan of $250,000. Person A would qualify for a loan with an interest rate of 6.36% with a monthly payment of $1,680. Person B would qualify for a loan with an interest rate of 7.95% and a monthly payment of $1,971. Thats a difference of $3,495 annually.
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