The FICO Credit Scoring System
FICO uses a statistical scoring system based on a person’s credit activity. Points are added or taken from the score depending on risk levels associated with each action. Missed payments, for example, will pull down the score considerably, whereas timely or advanced payments will have a positive effect.
The score takes into account 22 pieces of data from credit reports. These factors are grouped into five categories, each with its own weight in the overall calculations. The five categories are as follows:
Payment history – 35%. This category includes one’s payment behavior on different credit types, such as credit card, loans, and retail accounts. Any delinquencies and negative public records will also be considered. Missed and late payments can pull the score down by 15 points or more; deductions are larger for more recent violations.
Amounts owed – 30%. Fair Isaac calculates the total amount owed on all accounts and further analyzes each amount according to credit limit proportions. Each type of credit (open, installment, revolving) will be considered separately.
Length of credit history – 15%. The length of time the user has been handling credit also affects the FICO score. This category indicates the amount of time each account has been open and the time since the last account activity. Longer credit histories can be considered positive as long as all payments are made on time.
New credit – 10%. Newly opened accounts can reflect negatively on the FICO score, as they suggest that the person is overextending. On the other hand, reestablishing good credit after previous payment problems will add to the score. Credit inquiries are also considered—each inquiry takes one or two points away from the FICO score. The more recent the inquiry, the lower the score is pulled down.
Types of credit – 10%. This refers to the number and types of credit accounts maintained by the customer. Fair Isaac prefers a good balance of different credit types. It’s possible for a person with several diverse accounts to score more than another person with just a few well-kept but similar accounts.