The secrets to FICO scoring

[onehunglow]

Note: I had posted the information below on the myFico site and received great feedback, and them received word that my post would be removed because it divluged their own "secret" formula. Actually it does not give specifics, nor can you take this information and set up a competing FICO operation, but apparently it is too close to the exact calculation for their comfort.

 

Again, no Coke recipe here but if you want to know how the particular elements in each of your credit history make up the final score, this will explain all the "magic" behind the numbers.

 

---as posted---

I had a chance to spend some time and chat with a Fair Issac IT employee at a recent trade show, and of course I brought up the subject of the FICO scores and their secrecy.

 

He did admit that the official scoring IS secret, but is not that complicated to figure out given "everything that is disclosed publicly". The way scores are calculated are due to "weighting" - so if someone has some math backround, this sounds familiar.

 

First of all he says, scores are only within a specific range (I think I read 350 to 850 or something like that...that is there is no 'zero' score nor is there a 999 score) the actual range is 100% so 850-350=500 represents 100% every percentage counts as 5 points in that category....). It is apparently therectically impossible to score the lowest or the highest (like reaching infinity).

 

Now the 500 points (or 100%) is distributed as follows:

You start at 350 points - everyone gets that

35% (or 175 points) is 'payment history'

30% (or 150 points) is 'amounts owed'

15% (or 75 points) is 'length of credit history'

10% (or 50 points) is 'new credit'

10% (or 50 points) is 'types of credit'

---------------------------------------

100% or 500 points

 

Each category is calculated in its own way due to the nature of what it contains, for instance 'new credit' simply reduces scoring the more numbers (ie: inquiries) are put in there whereas 'payment history is the most complex requiring calculating number of accounts, average days due, length of account, etc)

 

Certain categories start out in the middle and + or - depending (like payment history) and some start out at max and go down as the numbers increase.

 

For instance, in the 'new credit' (which is the simplest apparently), you start with 50 points and it goes down by 10 every time you have a new credit app within the past 6 months. That number changes to 5 as the 3 months moves to 6 months and goes down to zero after a year. For instance you applied for a card this month, you lose 10 points. Apply for another, bang, another 10 points. You are down 20 points. as you pass the 3 months mark without applying for any new credit, the 20 becomes 10 - therefore you simply "gain" 10 points as time goes on. At the 6 month mark, you gain another 5 (as long as no new credit is applied for) and then another 5 at the one year mark. Now it sounds like you are GAINING points - but actually you are only winning them BACK from being lost.

 

Types of credit category: you start with 0. Now this is a 'portfolio' category. The 50 points "basket" is evaluated on the type of credit you have. Installment loans, or credit margins give you the MAX - the are harder to get and have a fixed monthy payment. 'Good credit' users have a healthy mix - like 2 installment loans and 2 credit cards and no finance loans. You get points mainly for a healthy mix - not just a number of credit cards. The numbers are something like 20 for Installment, margins, and car loans and 10 for credit cards up to 4, then you lose points (on CC's only). You lose points by having finance company loans (since their interest rates are highers and they are lenders of last resort and frequntly loans are 'secured' by home equity or a co-signer). The stronger your basket is, the higher your number goes - up to a max of 50 points of course.

 

Amounts owed category is "weighted". Basically it is credit used divided by credit available. The used divided by available factor is inversely scored. Mortgages do not count here. For instance, Having $20000 of credit and carrying all $20000 will give you very low points - maybe 10 points only out of 150 possible. But carrying a balance of 0 on $20000 available will score you close to 150 points! That means that although you have high credit limits, you don;t need or use that credit - a good risk and indication of good money management. Maxing out all credit limits (ie $20,000 owing on $20,000) will give you very few points - not 0 but something like 10.

However the higher the AVAILABLE credit number will give you more points. In other words 0/$500 does not carry the same as 0/$8000. And I was told that THIS category has the most significant impact. Keeping your balances low or nil will yield you close to 150 points reagrdless of any time element involved. Fin out when credit cards post their oustanding balances (usually it is your statement date but may be different) and make sure you can get your balanace paid off by that date - and then watch your score shoot up.

 

Length of credit history (75 points) is some convaluded formula that adds more points the longer you have credit history reporting for you. Basically it is 0 points when you start and maxes out at 75 if you have something like 40 years - which for most is around 58 years old !!! The MORE older accounts you have the better, and accelerates the score. Apparently they use points for months time accounts (ie 2 accounts x 200 months plus 2 accounts x 10 months plus 1 account x 5 months would give 425 month-accounts over a number like 800 = 54% and therefore give you 40 points out of 75 which is the percentage.

 

Payment History is a whopping 175 points and is the most complex. Late payments are killers here apperently. One late payment on an installment loan can wipe away 5 years of good payments. 60 days and 90 days erode your score in this category faster than water on your sandcastles. Collections are like grenades. And there is no easy fix except time and consistent good payments. The max is around 175 if all your accounts in the past 6-7 years are paid on time. ALL of them. Late payments are weighted (mean more) if they are more recent....and tend to be less destructive as they appear in the past. They "weight" these by looking at each account, seeing the reporting per month and seeing if each month was on time, 30 days late, 60, etc. They are not kidding when they say "pay your accounts on time". At least the minimums. Paying more than minimum does not count here (THAT will come up in the extended credit section if your balances are too high). They only want to see your payment history. Apparently there is no leeway or tolerance in this section. This tells them (creditors) how serious you are in paying your bills.

 

So out of the 5 sections, each one calculated on their own merits, they add up the results and come up ith your credit score. 350 + (165 + 110 + 67 + 40 + 40) = 772

 

So I did not walk away with the formula for Coke ...but I did get a general idea about how it all works.

[hegemony]

old news

[sara21200]

old news

 

always good to have a refreshers though

[collins135]

old news

 

always good to have a refreshers though

It may be old news to some but I am glad I just read this. This explains a lot to me. I have never seen it explained like this. Thanks for posting!

[sara21200]

Does that mean I am -50 on the new credit portion?

[Redundant2]

Jeez Heg, jaded much?

 

Seriously, thanks to the OP for posting this. Newbs like me find it very helpful indeed.

[SanDiegoCharger]

Great observations though it is key to make at least the minimum payment, this data is harvested and if you make only the minimum payments on most accounts you can be a candidate for a CLD. Some creditors look at payment performance closely and internally may refuse a CLI based on payment performance.

[alittlelooney]

Great Info. Thanks!

[eeyorelover]

Ok newbie question - couldn't find it doing a search

 

what is CLD???

 

Sorry but I will be asking these stupid questions probably till the day I die or reach credit nirvana - LOL

 

xxx

[SanDiegoCharger]

Ok newbie question - couldn't find it doing a search

 

what is CLD???

 

Sorry but I will be asking these stupid questions probably till the day I die or reach credit nirvana - LOL

 

xxx

 

CLD Credit Line Decrease

[MommyTo6]

Ok newbie question - couldn't find it doing a search

 

what is CLD???

 

Sorry but I will be asking these stupid questions probably till the day I die or reach credit nirvana - LOL

 

xxx

 

Credit Line Decrease

[eeyorelover]

Thanx so much!!!

[iluvthedusk]

yes. old news. good regurgitated info if you didn't know about it so for that, thanks for posting.

 

no one can figure out exactly how fico works. and unless you need to raise your score for some credit specific purpose, like a house or something, do things the old fashioned way and just pay your bills on time. FICO is not everything.

[hegemony]

the OP is nothing new and nothing you can't learn by trying to learn. I forgot I should not have an opinion.

[Rogue]

The score range for the Classic FICO Scoring model is 300 to 850, NOT 350 to 850.

[hegemony]

Jeez Heg, jaded much?

 

Seriously, thanks to the OP for posting this. Newbs like me find it very helpful indeed.

the reason I said old news is because there are much more cogent and technical discussions of credit scoring on CB and elsewhere PLUS the post has nothing in it that is "secret." not even close.

[AdamB60]

I knew about the percentage each category made up, but not how they related it to points. Kind of puts it in a simple way of viewing your score.

[goldtrad]

Speaking of FICO scoring and the credit card data I wonder if they differentiate between sub-prime and prime cards. I heard today that 0 balance on 100K available beats a 0 balance on 10K. So who knows. There might be other reasons other than utility and the size factor for going for more plastic.

[TScott]

I knew about the percentage each category made up, but not how they related it to points. Kind of puts it in a simple way of viewing your score.

Same here....

[ON-MY_way]

Jeez Heg, jaded much?

 

Seriously, thanks to the OP for posting this. Newbs like me find it very helpful indeed.

the reason I said old news is because there are much more cogent and technical discussions of credit scoring on CB and elsewhere PLUS the post has nothing in it that is "secret." not even close.

[onehunglow]

Yes, the percentage makeups are published and we all know them....but I was curious how the scores were derived from them.

 

And as I found out...each category is quite different in the way it is computed ...and comes out to a points system. Then they add up each set of points to get the score. Kind of like a school course - the final mark is made up of 40% of this, 30% of that, etc...but good to know exactly what they do in each category.

 

I had this idea to set up a website where anyone can go to - plug in their vital data (basic data not creditor names) that they pulled from their credit report, and get a score....now that I have a good idea how it is derived. Then allow you to "play" with some of the numbers and see what it does.

 

Knowing the formulas explain a few things - particularly why paying off an account in collection may have little or no effect in the FICO score- the reason being the penalty for an account in collection is so great that diminishing the amount owing (and therefore your 'total credit outstanding') has limited impact.

 

Thus the push to get that collection account removed altogether is so important.

 

Another thing which surprised me - mortgages, however big or period of time, have also little impact on the score - because it does not affect your 'total credit' (for mortgages). Late payments DO count though.

 

And so after I spent an afternoon with the Fair Isaac guy taking copius notes, I asked him whats the worst and best thing someone can do - and his answer is probably not surprising....

worst thing on your credit file - judgements with outsanding balances

worst in general - paying even small accounts late - 60 days late on a $10 minimum $200 Sears balance is just as bad as it would be on a $4000 credit limit! That means not paying $10 is equal to not paying $500 - if that is your minimm payment.

 

and the secret to bringing up the score .....drumroll....

 

Installment loans - the ones that the bank gives you. 2 loans of $2500 gives you twice the 'good' power as one $5000 loan!

 

So for those needing to rebuild credit (but you need some cash for this) - take out installment loans with your bank and pay them off early. No matter how bad your credit is, a bank will lend you the money with the same amount as collateral. For instance, you have a $2500 CD. You offer the CD as collateral towards a $2500 loan. The CD continues to generate interest (it doesn't have to be cashed in to be collateral) - and you take out the loan. Of course, you don't 'need' the money (or shouldn't) - and pay back the loan for a minimum of 3 payments (and see if you can pay the 'balance' off then). The loan gets the highest marks as what it is ...original balance is $2500 balance is $0. This stays on your file for 6-7 years depending on yoru state! Now some banks do not 'close' the loan - therefore reporting that you have a 'credit limit' of $2500 and a balance of $0 (ups your availabe credit).

 

Another fact I was told is to apply for loans during the last few days of the month - since loan officers have quotas too! And try and get them without collateral if possible.

 

Good to know that loans are not reported whether they are 'secured' or not. In other words your credit repor t does not disclose that the loan was granted because you had collateral - just that it was granted.

 

Then do it again - the idea is that instalment loans count more being 'recent' than ones years ago.

 

and last but not least - credit cards are mainly viewed as negative - even if you have 10 cards with high limits ...it is possible you can go out one day and 'blow it all' - rack up the balances...but you cannot do that with loans...thats why the latter are viewed much more favorably.

 

what a weird science this is!!!

[onehunglow]

Credit reports do not differentiate the TYPE of credit card (secured/unsecured, prime/subprime) per se... in the coding.

 

But the NAME of the card appears. And savvy loan or mortgage officers know what is what.

There are some companies that ONLY give sub-prime cards - therefore the name is a giveaway.

 

So if you are going to get a secured or sub-prime card, choose a card with a company that supplies BOTH types - that way it is not obvious which one you have

 

Also, instalment loans do not specify if collateral is being held by the bank. So. no one knows if the loan was granted on your own merit or because you shored it up with a security deposit.

 

and to the person that pointed out the 300-850 range...you are correct ...I wonder how bad a report has to be to have a 300 score!...

[Curious]

Yes, the percentage makeups are published and we all know them....but I was curious how the scores were derived from them.

 

And as I found out...each category is quite different in the way it is computed ...and comes out to a points system. Then they add up each set of points to get the score. Kind of like a school course - the final mark is made up of 40% of this, 30% of that, etc...but good to know exactly what they do in each category.

 

I had this idea to set up a website where anyone can go to - plug in their vital data (basic data not creditor names) that they pulled from their credit report, and get a score....now that I have a good idea how it is derived. Then allow you to "play" with some of the numbers and see what it does.

 

Knowing the formulas explain a few things - particularly why paying off an account in collection may have little or no effect in the FICO score- the reason being the penalty for an account in collection is so great that diminishing the amount owing (and therefore your 'total credit outstanding') has limited impact.

 

Thus the push to get that collection account removed altogether is so important.

 

Another thing which surprised me - mortgages, however big or period of time, have also little impact on the score - because it does not affect your 'total credit' (for mortgages). Late payments DO count though.

 

And so after I spent an afternoon with the Fair Isaac guy taking copius notes, I asked him whats the worst and best thing someone can do - and his answer is probably not surprising....

worst thing on your credit file - judgements with outsanding balances

worst in general - paying even small accounts late - 60 days late on a $10 minimum $200 Sears balance is just as bad as it would be on a $4000 credit limit! That means not paying $10 is equal to not paying $500 - if that is your minimm payment.

 

and the secret to bringing up the score .....drumroll....

 

Installment loans - the ones that the bank gives you. 2 loans of $2500 gives you twice the 'good' power as one $5000 loan!

 

So for those needing to rebuild credit (but you need some cash for this) - take out installment loans with your bank and pay them off early. No matter how bad your credit is, a bank will lend you the money with the same amount as collateral. For instance, you have a $2500 CD. You offer the CD as collateral towards a $2500 loan. The CD continues to generate interest (it doesn't have to be cashed in to be collateral) - and you take out the loan. Of course, you don't 'need' the money (or shouldn't) - and pay back the loan for a minimum of 3 payments (and see if you can pay the 'balance' off then). The loan gets the highest marks as what it is ...original balance is $2500 balance is $0. This stays on your file for 6-7 years depending on yoru state! Now some banks do not 'close' the loan - therefore reporting that you have a 'credit limit' of $2500 and a balance of $0 (ups your availabe credit).

Another fact I was told is to apply for loans during the last few days of the month - since loan officers have quotas too! And try and get them without collateral if possible.

 

Good to know that loans are not reported whether they are 'secured' or not. In other words your credit repor t does not disclose that the loan was granted because you had collateral - just that it was granted.

 

Then do it again - the idea is that instalment loans count more being 'recent' than ones years ago.

 

and last but not least - credit cards are mainly viewed as negative - even if you have 10 cards with high limits ...it is possible you can go out one day and 'blow it all' - rack up the balances...but you cannot do that with loans...thats why the latter are viewed much more favorably.

 

what a weird science this is!!!

 

I appreciate your post but question that info about installment loans. Installment loans have had little effect on my score and that seem to be the consensus among a lot of folks on this site. When the number of my installment loans increased I even got a negative reason code 'that having too many installment accts could hurt me because creditors could view me as being overextended.' On the other hand, revolving accts have had a major impact on my score, especially the utilization effect.

[Jen23514]

old news

 

not to some around here....

[Kona]

old news

 

not to some around here....

 

It may be old to some; new to others. With all the tweaking going on and changes coming, I wouldn't get excited about basing decisions on specifics in each scoring category.