Understanding FICO Scores



"We do not remember days, we remember moments.” - Cesare Pavese

One of the most confusing and misunderstood components of modern life is an individual’s credit score. A simple Google search reveals billions of websites and posts, all sharing information -- some of which is accurate, and some of which is just plain wrong.

At its core, it’s simply a number that tries to represent the likelihood that you will pay back money that you borrow. Because banks and lending institutions use credit scores as a key component in their determination to lend money, it’s also a key element for individuals with nefarious plans – stealing a person’s identity allows your credit worthiness to also be stolen and used by the crooks.

Unlike, for example, annual income, FICO scores represent long-term action (or inaction) on the part of the consumer, so while the actual number can be “managed,” to an extent, it tends to be a pretty good representation of how well a person repays debts.

Now, obviously, there is more to it than that. A FICO score merely represents the number, arrived at through a series of top-secret mathematical computations made by the FICO folks, based on information contained in your credit report. Three primary credit bureaus - Experian, Equifax, and TransUnion – provide this information to lenders, and while it may be logical to think one bureau could handle all this data, not all creditors and lenders furnish information to all credit bureaus.

Different Bureaus, Different Scores?

Just as credit bureaus are individual companies, each bureau calculates scores in slightly different ways. In fact, it’s not unusual to see multiple credit scores originating from different bureaus – your FICO 2 score from Experian, used for mortgages, will be quite different from your FICO 8, used for credit cards, from Transunion. Obviously, this can be confusing for consumers, especially given the fact there are so many ways to check your credit score online today.

One of the main challenges, in fact, comes from this wealth of information that’s available to us today. You might review your credit score online with, for example, your credit card company, which only calculates credit worthiness based on a VantageScore 3 model – not the official FICO number – and draw an incorrect conclusion about what your credit score is.

To make things even more complicated, each credit bureau has slightly different internal rules for when they delete or update items on your credit report. There are federal laws covering  minimum standards, but credit bureaus can and do play by their own rules beyond those federal guidelines.

Getting Clear on the Rules

The numerous variables from credit bureaus lead back to the use of FICO by most lenders. By taking an average from the primary credit bureaus, a FICO score represents a reliable average of an individual’s ability to repay a debt.

For a consumer, the challenge is simple: Which one of the multiple scores will be used to qualify creditworthiness? There are no hard-and-fast rules for this, but it is logical to assume that if your credit card company has a “free credit check” benefit available to you on their website, chances are that’s the information they’d use to qualify you for a new credit card or credit limit increase.

Likewise, your local bank or credit union may discuss which credit score they use for their underwriting – and that may be more than one, based on the type of loan – such as home mortgage, unsecured loan, auto loan, and so on.

FICO does provide a generic, ballpark estimate of the factors that go into calculating your score:

  • Your payment history: 35% of your score

  • How much debt you owe: 30% of your score

  • Length of credit history: 15% of your score

  • The mix of different credit types you have (credit cards, mortgages, etc.): 10%

  • How much new credit you’ve recently opened: 10%

Again, these are just rough guidelines provided by FICO. They are far from exact, and the exact formulas for each of the different score types are all trade secrets.

How to Raise Your Credit Scores

No matter which credit bureau is being used, or even which exact FICO version is being used, the simple fact is that there are very few legitimate ways to “hack” your credit score. Because of this, you need to be wary about snake oil salesmen promising they can raise your score for you.

There are effectively only two ways to raise your credit score.

First, request a copy of your credit report from Experian, Equifax and TransUnion and verify all the information contained in them is correct. Often, an error can negatively impact your credit, and mistakes do happen. According to the Federal Trade Commission, 1 in 5 Americans has at least one error on their credit report, and about 5% of people have a “serious” error on at least one credit report.

So, pull copies of your reports (available for free from AnnualCreditReport.com) and scour them for errors. You can then open a dispute online with each bureau to start the process of cleaning up bad information.

Second, pay your bills on time and don’t overextend yourself on your accounts. A good rule of thumb is to carry a balance of no more than 30% of the total available credit on any credit cards you might have. This is called your utilization ratio and plays into that 30% of your score mentioned above in relation to how much debt you owe. By using less than 30% of the available credit on your credit cards, you demonstrate good use of credit. Get that number below 9%, and you’ll be in the “excellent” category.

Other than that? There’s actually very little to do except be responsible. Your FICO score often moves slowly, over time, but can rarely be manipulated in the short term.  This is the exact reason it is viewed as such a valuable tool for banks and creditors. 

Managing your credit score really comes down to managing your personal finances. So, if you need some help with the family budget, a plan to get out of debt, or have similar personal finance concerns, check with your tax pro.

BE THE ROAR not the echo®

Janet Behm
Utah Real Estate Accountants
(801) 278-2700

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