When you apply for credit – whether it’s a credit card, car loan, or a mortgage – lenders
want to know what risk they assume by lending money to you. FICO® scores are the credit scores
most lenders use to determine your credit risk. You have three FICO scores, one for each of the
three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the
credit bureau keeps on file about you. As this information changes, your credit scores tend to
change as well. Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.)
lenders will offer you at any given time. Taking steps to improve your FICO scores can help you
qualify for better rates from lenders.
In Canada we use Beacon Scores most often to rate a customer’s credit.
How is a FICO score determined?
In general terms, the FICO score evaluates five main categories of information:
- Payment history (35% of the overall score)
- Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items).
- Severity of delinquency (how long past due).
- Amount past due on delinquent accounts or collection items.
- Time since past due items (delinquency), adverse public records (if any), or collection items (if any).
- Number of past due items on file.
- Number of accounts paid as agreed.
- Amounts owed (30% of the overall score)
- Amount owing on accounts.
- Amount owing on specific types of accounts.
- Lack of a specific type of balance, in some cases.
- Number of accounts with balances.
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts).
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).
- Length of credit history (15% of the overall score)
- Time since accounts opened.
- Time since accounts opened, by specific type of account.
- Time since account activity.
- New credit (10% of the overall score)
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
- Number of recent credit inquiries.
- Time since recent account opening(s), by type of account.
- Time since credit inquiry(s).
- Re-establishment of positive credit history following past payment problems.
- Type of credit used (0% of the overall score)
- Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).
- Add it up and you get…?
- Each of the above noted factors, along with others, are assigned a value and a weight. The results of these factors are then added up and combined into a single number. FICO® scores can range from 300 to 800. The higher the number the better.
- In general terms, borrowers with reasonable credit typical have FICO® scores, which range between 600 and 800.