A Good Credit Score - FICO Scoring

Everyone wants to know what The Best/Good Credit Score is. The reason is that the person who is inquiring is usually about to need their credit pulled to see where they stand as they want to buy something. They know that there is so much weight that goes into their FICO Score. It depends of course on what they are buying, and if they are going to a bank for a consumer loan, or if they are about to buy a new home.

I saw something recently that said any score below 750 was bad. Well….if that is the case then there would not be many consumer loans made, or mortgage loans being originated. Yes, the higher a FICO (credit score) is; the better is it, but a credit score below 750 is not considered a “bad” score. In fact FICO Corporation states that 760 is considered a high credit score with score ranging from 300 – 850. During a study done by FICO, from October 2008 to October 2009- the average credit score was 711. This was based solely on Equifax bureau. There is no doubt that this averages have changed to date. These averages and factors change as the criteria changes within a credit report based upon each consumer report. Your credit makes up the FICO score and how you use your credit or pay your bills. The average does not stay the same; it may fluctuate periodically based on certain information. The way people use their credit is of most importance.

In 2005 the median score was reported to be at 753. It is lower due to all factors of the economy and the statics of how they maintain the standards and the changes that took place in FICO in 2008.

Experian, Equifax and TransUnion are the three major credit bureaus. They are the ones that you must correspond with when you need something changed on your credit report. Your must report to all three of them; sending information to only one of them, does not work. You must report anything derogatory or information that might be incorrect or erroneous to all three bureaus.

A credit score of 650 - 680 does not necessarily means a borrower or consumer has bad credit. It will depend upon the factors that make up the score as mentioned here and may not be the entire story of the persons credit if it is only one bureau. That is why the credit is evaluated to see if a consumer pays their obligations in a timely manner. All accounts may be paid within 30 days but the consumer may have multiple revolving changes and several with high balances, which again indicates he/she is a credit risk. Or it could be they have obtained new credit within the current year or so. The more credit one has the larger the credit risk. How the person pays and maintains their credit obligations and how much credit they have. Sometimes a score may be 640 because there are too many trade lines of revolving charges. This could be that a person has co-signed for someone else. The latter is not a good idea, because it will affect your credit if the person falls short of paying the account within 30 days.

Each of the three bureaus have different scores usually, because they each receive different information that determines the score; (not always but usually) this is why a mortgage lender will pull all three bureaus and they will use the middle (representative) score for all three bureaus. This is why it is important to know that each bureau has the correct information in all instances. If you have had a medical charge and the hospital only reported to one bureau, yet another bureau did not get the paid status; this could make your score different for that bureau.

Banks do not pull all three bureaus.  They normally report to only one bureau and they pull from one bureau.  This is a diverse situation and any loan officer or underwrite should analyze the criteria under each bureau (or the specific bureau they have pulled) to make sure it is reported correctly and does not represent false information or inaccurate information. Especially if the score is inadequate and not within their guidelines for lending. 

The score is made up of percentages for certain things about how much credit you have, how long you have had it and how you use it. FICO states that first; the credit is of most important, after all this is what the credit report is about. This is 35% of the make up of the score. They then state that another heavy weight is the utilization of credit. This is in reference to the high balance versus the current balance. For instance you have a $5000 credit line and you owe $4500; your score will be lower due to high usage of credit; you are a higher risk. However, if your credit line is $5000 and you only owe $1500; your score will more than likely be higher and present less of a credit risk. This example reflects about 30 percent of your FICO.

The next applicable measure is the length of time the account has been open…this is about 15 percentage of the score. Meaning if an account opened in 1995; the score will be higher than one who has an account opened in 2009.

The last two measures are credit inquiries or how many times you have applied for credit equals about 10 percent and the types of credit another 10 percent. So, there you have what makes up the scoring since the 2008 changes of FICO.

Most of us know why FICO was changed and it all had to do with the mortgage meltdown and the slide of the economy and the lenders trying to have a better risk assessment model to go by. Not all people think this is good for lending but they are usually not the people who lend the money.

These are facts that FICO and any person who deals with credit will suggest for anyone who wants to know how to have a good credit score.

• Pay obligations on time
• Keep outstanding balances as low as possible without reaching the high balance
• Use credit sparingly without lots of request for credit

Source: FICO Corporation and MDN