How Your FICO Credit Scores are Determined

Another nice guest post from Noreen…

Confusion abounds about the difference between credit reports and credit scores. Many people mistakenly think they’re one and the same, perhaps because the terms are often used interchangeably when discussing the condition of their credit. Both credit reports and scores are reviewed by potential lenders and can influence the ability of consumers to secure the credit they may need. Credit reports are detailed compilations of your credit history; credit scores are ratings that provide a numeric gauge of a consumer’s credit that can fluctuate over time.

The FICO model is used by the major credit reporting agencies to calculate statistics found in your credit reports (compilations of your financial activity) to come up with your credit scores that range from a dismal 300 to an excellent score of 850+ points. Credit scores are fluid and give potential lenders an idea of a consumer’s credit worthiness at a glance.

The average American falls in the middle of the credit score range, closer to good than excellent. Taking the three independent scores together and dividing the total by three will give your average overall score. For the purposes of lenders, they generally use the middle score to determine loan eligibility. What may be considered a few measly points can make a huge difference in being approved for a loan with an excellent rate and one that requires collateral and charges a high interest. A one point shift may cost thousands of dollars over the course of a 30 year mortgage.

The most respected and utilized credit reporting agencies, Experian, TransUnion and Equifax, use their own algorithms to produce their independent FICO scores. In essence, credit scores reflect the competence of a consumer’s financial management and how well or poorly they handle finances like bank accounts, loans, etc. According to the Fair Isaac Corporation (FICO), the breakdown of how your actions impact your scores follows:

  • Payment History (35%) – How well you manage paying your bills has the biggest effect on your scores. On-time payments will help to elevate your score, while late or missed payments will lower your score.
  • Credit Utilization (30%) – Don’t spend more than forty percent of your allowable credit to protect your credit score. Using a large percentage will raise your credit utilization ratio and negatively impact your score. The utilization ratio is the amount you owe divided by the total amount extended by your creditors; the lower the percentage the better for your FICO rating, in general. Raise your score by opening a new line of credit or requesting an increased limit or by paying off debt to lower the utilization ratio. Closing an account will also have an adverse affect on your FICO score.
  • Credit History (15%) – The longer you have managed credit accounts responsibly the more positive your history will have on your score. Little or no credit history will keep your score low. Without any debt, there is no way to determine your probability of making late or missing payments.
  • Credit Types (10%) – Having a variety of loan types, including a mortgage, installment and revolving credit accounts, is a positive goal.
  • Credit Inquiries (10%) – When you apply for a loan, the lender may request to see your credit report, sometimes called a hard inquiry. Too many requests may be an indicator of money problems and your credit score could take a hit. The system attempts to differentiate between an application for credit and those that are necessary when rate shopping for a mortgage or auto loan. Requests to review your own report and those pulled by your employer are considered soft inquiries and won’t impact your score.

Other Factors that Affect FICO Scores

Court Rulings – In addition, you will see a drop in your score for every court judgment that includes money, including tax liens, and collections. Scores have been known to plummet by as much as 250 points following bankruptcy.
The drop will be significant enough that you will be considered a high risk customer by most lending institutions.

Late Payments and Defaulted Accounts – Even one late or missed payment can lower your score. Walk away from a legitimate debt and the drop can be devastating. A delinquent mortgage that resolves in a short sale, deed in lieu or a foreclosure will shave off another 85 to 160 points.

Errors on Your Credit Reports – Neglecting to have errors and discrepancies expunged from your credit reports may mean an undeserved negative financial reputation or risk being victimized by an identity thief. No one knows better than you if the items listed on your credit reports are legitimate. Every American is allowed one free copy from each bureau every twelve months by visiting or calling 877-322-8228. Contact the credit agency, if you find errors.

A staff writer for, Noreen Ruth is also a regular contributor to a wide variety of financial-related blogs and websites. She specializes in credit and debt-related issues, and provides useful information to help consumers choose the right credit cards and make prudent financial decisions. Follow her regular posts on the ASAP Credit Card Blog to stay up-to-date with the latest credit card news, reviews, information and more.

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