How Do FICO Scores Get Determined?


Credit scoring is an objective means of determining creditworthiness of potential borrowers based on a number system. It is a numeric representation of the borrower’s credit profile by assigning specified numerical values to different aspects of the borrower. These numbers are adjusted up and down based on the strengths and weaknesses of particular qualifications. All lenders use credit scores as a part of the underwriting process.

For example, a person with a large line of available credit that is hardly used would likely score higher than a person Vegasgoal with lower credit limits but whose credit cards are all maxed out. Someone with a lengthy employment history with the same company would score higher than a person who just joined a new firm. The numbers are added from all the categories and a credit score based on these various criteria is assigned.

Credit scores also play an important role in automated underwriting since Fannie Mae and Freddie Mac have identified a strong correlation between mortgage performance and credit scores. The higher the score, the better credit risk a borrower is; the lower the score, the higher the risk of default.

FICO is a system developed by Fair, Isaac & Co. and used by Experian. BEACON is a credit score used by Equifax.

TransUnion calls their score EMPIRICA. These scores are the result of very complex calculations carried out by a computer that takes into account every aspect of the borrower’s credit file. Items considered include the following:

1) Number of open accounts
2) Total Credit Limit
3) Types of credit (e.g., credit cards, installment loans)
4) Length of credit history (e.g., when opened, latest activity)
5) Total amount of debt outstanding
6) Number of late payments in the past 30-60-90 days
7) Presence of adverse public records (e.g., liens, judgments, or bankruptcies
8) Number of recent credit inquiries
9) Re-establishment of positive credit history after past payment problems

Each of these three main credit bureau scores is calculated a little differently. For example, FICO weighs credit history as thirty five percent of the total score, amounts owed as thirty percent, length of credit history as fifteen percent, and new credit and types of credit used as ten percent each. Regardless of the actual calculation, all credit bureaus produce similar credit scores, which range from about 300 to 850. While lenders can’t tell you exactly how each credit score is computed, they can tell you what cutoff scores they use in qualifying borrowers for various mortgage loan programs.

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