Do you really know what a FICO score consists of?

Since this is my first blog on Bigger Pockets I thought I would start with the basics of FICO scoring. This may be rudimentary for some but we see so much confusion each day in our office that it is a good starting point. From here, I encourage BP members to reach out to me and let me know what they want to see as subjects of future blog posts. This is one way I give back, so all questions and comments welcome. 

Lets get started! 

FICO is the credit scoring system that 90+% of lenders us in determining whether to offer credit or not. FICO scores are used in about 10 billion decisions worldwide each year. FICO was originally called Fair Isaac and Company and was founded in 1956. They changed their name to Fair Isaac Corporation in 2003 and finally FICO in 2009. 

While the inner workings of the FICO scoring system are a closely guarded secret, the company is open about the five general components that make up the score.

1. Payment History - 35% of the entire score is based on a borrower's payment history, making the repayment of past debt the most important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior.

2. Credit Utilization - 30% of the entire score is based on a borrower's balance to limit ratio. Add up all your balances and limits and divide the balance by the limit to get your total utilization percentage. 

3. Length of Credit History - 15% of the entire score is based on a borrower's length of time accounts have been open and length of time since the account's most recent action.

4. New Credit - 10% of the entire score is based on a borrower's newly open credit. This area is important to not show a history of opening many accounts at the same time. 

5. Credit Mix - 10% of the entire score is based on a borrower's mix of credit. This is somewhat of a vague category, but experts say that repaying a variety of debt indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders. A good mix would be 3-5 credit cards, a mortgage, and an auto loan.

As I typed the FICO components I started to realize that delving into each component could be an entire blog post in itself. So moving on to the next 5 posts I will go into deep detail on each factor (insider tips, good practices, bad practices, etc...)

On a final note, here is the most common thing that people don't understand about scores. Credit cards make credit scores go round! A credit card makes up 80% of your entire FICO score or the first 3 of the 5 factors in the FICO pie chart. You can bump it to 90% if you have a new card or cards (new is generally 2 years or less). 

To maximize your credit score in terms of a credit card the key points are:

Open date is 7 years or longer

0-7% utilization

Perfect pay history with no lates

I hope this helped some of you with the basics. I am extremely passionate about teaching credit from the basics to a very high level and look forward to hearing from you. 

Brent O'Connell