FICO Scorecard Characteristics

Whenever you apply for credit, your FICO score serves as the historical record and monitoring tool for the measurement of your credit worthiness and predictive credit behavior. The scoring system was established in 1956 by the Fair Isaac Corporation. The three major credit bureaus, Experian, Equifax and TransUnion, use this rating system which focuses upon repayment history, balances owed, credit history length, recent or new credit and types of credit.

Overall Ratings

Good credit ratings result in credit acceptance, lower interest rates and higher loan amounts.

Each of the three major credit bureaus conduct an independent rating of your credit worthiness, which affects your ability to obtain credit under the terms offered by creditors. The numeric codes range from 300indicating a very low scoreto 800, which is the highest possible score. A score below 620 is viewed as being low and will result in difficulties when applying for loans, while a score of 720 is considered excellent with low credit risk and a high probability of credit approval. The higher the credit score, the lower the interest rate.

Repayment History

Repayment history represents a large portion of your FICO score.

The repayment history portion of the FICO score counts for 35 percent of your overall rating. Therefore, it's important that you pay all obligations on time including medical bills, parking tickets and fines since your history serves as a focal point for the future.

Balances Owed

The debt to equity ratio of your loans should decrease or remain stable.

The balances owed section of the FICO score counts for 30 percent of the total. As the number and amount of balances owed for credit cards and revolving lines of credit increase, your FICO score will decrease. When your credit card balances increase relative to the amount of credit available, your score is negatively impacted because your debt to equity ratio is increasing.

Length of Credit History

Credit history that withstands the test of time helps your FICO score.

The length of your credit history counts for 15 percent of your total FICO. If you have used only a few credit cards over a longer period of time and have repaid auto loans within the proper time frames, your FICO score will be positive because it indicates that you are a responsible borrower who is likely to repay their debts.

Recent or New Credit

A rash of new credit cards obtained and inquiries lowers your credit score.

Recent or new credit accounts opened as compared to the total number of existing accounts shown on your credit reports could hurt your FICO score because it might signal financial trouble. Also, a sudden increase in the number of new inquiries by credit card companies for your credit history could create warning signs and lower your score. However, short term shopping for mortgage or auto loan rates should not hurt your rating as long as the inquiry period is short term. This section counts for 10 percent of the total score.

Types of Credit

Your FICO score is helped by having installment credit as well as revolving credit.

Diversification of credit helps your FICO score by demonstrating the level of commitment you have toward paying down various types of obligations such as mortgages, auto loans and credit cards.

Fair and Accurate Credit Transactions Act (FACTA)

FACTA is a consumer law that allows you to have access to your credit information.

FACTA was passed into law during 2003 in order to provide consumers with access to their credit reports. FACTA allows you to obtain a free credit report from all three credit bureaus once a year. It also allows you to report errors to the credit bureaus for purposes of having them removed.