Anyone who has been investigating getting a mortgage or refinancing an existing home is familiar with the FICO score. This three-digit score is what lenders use to determine whether an applicant is a good credit risk. A number of factors can influence exactly how high or how low a person's FICO score is, including inquiries into creditworthiness, as well as having too many credit accounts.
History
FICO scores were created by Fair Isaac Corp. and were designed for each of the three major credit reporting agencies --- Experian, TransUnion and Equifax. FICO scores got a lot of press when people started to apply for home mortgages during the housing bubble of the early 2000s, but they were in use as far back as the 1950s. They arsed by credit card companies, as well as store merchants, banks and insurance companies.
Factors
FICO scores are based on the amount of debt that an individual has accumulated, and if an applicant is trying to get another credit card, the FICO algorithm will lower the score. For example, if a credit card company has been examining a FICO score because the individual has applied for a credit card, that can drop the FICO score. The actual algorithms used to develop a FICO score are copyrighted and are not known by either the general public or even by financial professionals. On the other hand, if an individual checks her own FICO score, that will not affect the FICO score.
Features
The range of scores available from FICO is from 300 to 850. The lower the score, the more of a credit risk a candidate is considered. If a credit card company requests a copy of someone's credit report because of an application, the FICO score can get lowered. But, if a credit card company requests a copy of the credit report to send out "pre-approval" marketing material, the FICO score will not be lowered for that "soft pull" of the credit report, because the consumer is not seeking additional credit in that instance.
Misconceptions
When it comes to FICO scores, some misconceptions are prevalent. One of the most common misconceptions is that closing an account can help raise a FICO score. This is actually false. The FICO score is based upon the available credit in relation to credit being used. When an account is closed, less credit is available, which makes the ratio of credit used to credit available higher. For a higher FICO score, the best option is to keep all credit accounts open but with low balances.
Future
In 2010, a new FICO score was introduced --- the FICO 8. This particular scoring method is designed specifically for real estate. It is designed to analyze factors to better determine the mortgage repayment risks, according to the company.
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