Fico Score

Is Your FICO Credit Score Wrong?

The FICO credit score is one of the most well-known of all the credit scoring systems used in the USA. Lenders calculate the score by applying certain statistical methods on information contained in a person's credit file. The Fair Isaac Corporation developed this credit scoring method and is where the name FICO comes from. FICO is an acronym of the corporation's name.

Banks and other lending institutions use the score as a quick way of deciding about your financial situation. For example, if you apply for a loan from the X Bank, the loan officer will get your score to see if she should continue processing the loan application further. If your score is an acceptable one she could call up more information about your credit history. If you have a low credit score, she might decide to pass on your application.

Your score also helps lenders decide on an interest rate. They can offer you a high rate, meaning you will pay more for your loan, if you have a 600 credit score. In contrast, you can get a good rate if you score 700 or more. The higher your score the lower your interest costs compared to other people looking for loans. Your score will also affect your application for lines of credit, or even if you are looking to buy physical products on credit from a supplier. Of course, your FICO score is the lender's first line of defense. Once you get pass this stage, many more subjective and nonsubjective factors come into play.

However, your FICO score is only as good as the information used to calculate the score. If your credit file contains wrong or damaging information, your score will reflect these differences. That is why you should actively check your credit history every year or so. Sometimes bad information gets there from credit information providers who are careless with their credit reporting procedures. Occasionally, a lender might take a late payment, for example, and apply the strictest rule to it. So, it is important you keep a close check on your file.

The original FICO score calculation involves a few important pieces of information from your credit file. The final score includes the statistical analysis from these five major items in your file.

1. Payment History - This shows exactly how your payments are going whether you pay them on time or have missed some. Your payment history accounts for 35% of the score.
2. Amounts owed - This analysis includes all your open accounts with emphasis on the balance on each account. Your outstanding balances make up 30% of the final score.
3. How old is your credit file - Time is a contributing factor when lenders calculate your FICO score. Did you get your first credit one year ago, five years ago, or only recently. This part only describes 15% of the total FICO score.
4. New Credit - The credit reporting agency will look at what new lines of credit you have recently taken out. This part only accounts for 10% of what the score.
5. Type of Credit - Having a gas card or a retail credit card can make a big difference when lenders calculate your score. Mostly, major credit cards from major institutions count more than the retail cards. However, this feature only affects 105 pf the calculated score.

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