Breaking Down the Meaning of FICO

Pelagic Capital Corporation, like many others in commercial and consumer lending is tasked with the challenge of assessing risk in the act of lending. Granting credit is often predicated on the perceived ability of a borrower to repay their obligations and debts. One of the many tools used to measure that ability includes the review of the historical patterns for which an applicant has managed their borrowing history. With the help from the website Myfico, we will try to demystify some of the information used in the popular tool, the FICO Score.

First, let’s look at the high level view of what Fico may represent;


FICO Scores are an industry standard

90% of top lenders use FICO® Scores when making lending decisions. So when you apply for a loan, it’s likely your lender will be checking your FICO Scores to determine how much you can borrow and how much interest you’ll pay.


They’re based on your credit history

FICO® Scores make lending fairer. They summarize your credit history using a scientific algorithm so lenders can make well informed decisions. They’re based on your financial decisions, so they change as your credit reports change.


They can save you thousands of dollars

High FICO® Scores can give you access to the best loan and credit card rates — and those savings really add up. Prepare for your next loan by monitoring changes, and get a better understanding of your full credit picture.

Now, we move a level lower,…


What is a Credit Score?

A credit score is a number that summarizes credit risk, based on a snapshot of a credit report at a particular point in time.

About FICO® Scores

The most widely used credit scores are FICO® Scores, the credit scores created by Fair Isaac Corporation. 90% of top lenders use FICO® Scores to help them make billions of credit-related decisions every year. FICO® Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies.

By comparing this information to the patterns in hundreds of thousands of past credit reports, FICO® Scores estimate your level of future credit risk.

Credit scores influence the credit that’s available and the terms (interest rate, etc.) that lenders may offer. It’s a vital part of credit health. When a consumer applies for credit – whether for a credit card, an auto loan, or a mortgage – lenders want to know what risk they’d take by loaning money. When lenders order a credit report, they can also buy a credit score that’s based on the information in the report. It’s important to understand that not every credit score offered for sale online is a FICO® Score.


What is a good credit score?

Base FICO® Scores have a 300–850 score range. The higher the score, the lower the risk. But no score says whether a specific individual will be a “good” or “bad” customer.

While many lenders use FICO® Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.


How my FICO Scores are calculated

FICO® Scores are calculated from many different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Scores are calculated.


How a FICO Score breaks down

fico score broken down

Now for each of the components;

Payment history 35%

Credit payment history determines 35% of a FICO Score

The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO® Score.

A few late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of late credit card payments.

However, having no late payments in your credit report doesn’t mean you’ll get a “perfect score.” Your payment history is just one piece of information used in calculating your FICO Scores.


Credit payment history on many types of accounts

Account types considered for payment history include:

  • Credit cards (Visa, MasterCard, American Express, Discover, etc.)

  • Retail accounts (credit from stores where you shop, like department store credit cards)

  • Installment loans (loans where you make regular payments, like car loans)

  • Finance company accounts

  • Mortgage loans


Public record and collection items

These types of events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts.

Negative factors include:

  • Bankruptcies – will stay on your credit report for 7-10 years, depending on the type

  • Foreclosures

  • Lawsuits

  • Wage attachments

  • Liens

  • Judgments


Details on late or missed payments (“delinquencies”) and public record and collection items

FICO® Scores consider:

  • How late they were

  • How much was owed

  • How recently they occurred

  • How many there are


Amounts owed 30%

  • Amount owed on accounts determines 30% of a FICO Score

    • Owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower with a low FICO® However, when a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.

    • Part of the science of scoring is determining how much is too much for a given credit profile. Your FICO Scores take into account several factors.

  • The amount owed on all accounts

    • Note that even if you pay off your credit cards in full each month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.

  • The amount owed on different types of accounts

    • In addition to the overall amount you owe, your FICO® Scores consider the amount you owe on specific types of accounts, such as credit cards and installment loans.

  • Whether you’re showing an amount owed on certain types of accounts

    • In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. Having a low credit utilization ratio can be better than having a high one, or none at all. For example, closing unused credit accounts that have zero balances and are in good standing will not raise your FICO®

  • How many accounts have balances

    • A larger number of accounts with amounts owed can indicate higher risk of over-extension.

  • How much of the total credit line is being used and other “revolving” credit accounts

    • Someone who is close to “maxing out” several credit cards has a high credit utilization ratio and may have trouble making payments in the future.

  • How much of the installment loan amounts is still owed, compared with the original loan amount

    • For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you still owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you’re able and willing to manage and repay debt.


Length of credit history 15%

In general, a longer credit history will increase your FICO® Scores. However, even people who haven’t been using credit long may have high FICO Scores, depending on how the rest of the credit report looks.

Your FICO Scores take into account:

  • how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts

  • how long specific credit accounts have been established

  • how long it has been since you used certain accounts


Types of credit in use 10%

  • Credit mix determines 10% of a FICO Score

  • FICO® Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.

  • The credit mix usually won’t be a key factor in determining your FICO Scores—but it will be more important if your credit report does not have a lot of other information on which to base a score.

  • Have credit cards – but manage them responsibly

  • Having credit cards and installment loans with a good payment history will raise your FICO Scores. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.


What types of credit accounts you have?

  • Do you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?


How many types of credit accounts?

  • Your FICO® Scores also look at the total number of accounts you have. How many is too many will vary depending on your overall credit picture.

  • Closing an account doesn’t make it go away

  • A closed account will still show up on your credit report, and its history will be considered by your FICO Scores.


New credit 10%

New credit determines 10% of a FICO Score

People tend to have more credit today and shop for new credit more frequently than ever. FICO® Scores reflect this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history. Your FICO Scores take into account several factors, including how you shop for credit.


Its OK to request and check your own credit report

Checking your credit report won’t affect your FICO Scores, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers, such as myFICO.


How many new accounts you have

Your FICO® Scores look at how many new accounts you have by type of account. They also may look at how many of your accounts are new accounts.


Don’t open new accounts too rapidly

If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your FICO® Scores if you don’t have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your FICO Scores.


How many recent inquiries you have

An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months. FICO Scores have been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.

There are 3 important facts about inquiries to note:

  • Inquiries usually have a small impact

  • Many types of inquiries are ignored completely

  • The score allows for “rate shopping”


MYTH: My FICO Scores will drop if I apply for new credit

TRUTH: If they do, they probably won’t drop much. If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.


Length of time since credit report inquiries were made

When you shop for credit, inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months.


How long it’s been since you opened a new account

Your FICO® Scores may consider the time that has passed since you opened a new credit account, for specific types of accounts.


Whether you have a recent good credit history, having bounced back from past payment problems

Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a FICO® Score over time.



We hope this article cleared up what a FICO score is composed of along with debunking any rumors circulating about them.

Whether your needs include replacing equipment, upgrading equipment, or acquiring new equipment for growth, Pelagic Capital Corporation is here to help with all of your equipment financing and leasing needs. Having prior funded hundreds of millions of dollars of equipment we understand the ins and outs of getting you funded.

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