Credit Education

FICO Scores: The Only Ones That Count

Pay attention to your FICO scores; avoid FAKO scores. Only Fair Isaac Corporation scores are accepted by lenders to qualify for loans.  Most online scores are what we call FAKOs. They are not FICO scores. You will find FAKOs at FreeCreditReport.com, Experian’s Credit Plus score, Trans Union’s TrueCreditScore and many others.  If you don’t see FICO next to the score, it is a FAKO. MyFICO.com is the only place to get your FICO mortgage scores online.

Small Mistakes Cost You Big Points

One 30-day late payment will lower a 680 credit score 40-80 points.  Why so many points? FICO scoring is a future risk assessment, so it assumes that there is a high likelihood that the late payment was caused by a real cash shortfall. FICO is anticipating that the consumer is essentially broke, and this late payment is the first sign of future defaults or possible bankruptcy.

Time Heals; Recency Kills

Bad events lose their punch over time.

The "recency" aspect of a negative event influences your score the most. We put recency in quotes because many creditors, and most collection companies, report incorrect recency data to the credit bureaus. (Some errors can be corrected by bureau disputes.)

Creditors Make Errors that Decrease Your Credit Score

The error that creditors always seem to make is to report a bad event as more recent than it actually was. This lowers your score and makes you appear less credit worthy than you really are. Your score will recover as time passes – if there are no new bad events.

Revolving Accounts Matter The Most

Revolving accounts, such as credit cards, are by far the most score influencing. Because installment and revolving accounts were created for different reasons, they have a significantly different influence on scores.  

Installment accounts were designed for long term financing. Mortgage and Auto Loans are Installment accounts. Revolving accounts were designed for short term, 30-day to 90-day, debts. FICO is weighted toward revolving debt which it regards as a much better indicator of credit worthiness. Think about what a teenager usually does with his or her first credit card, and you have an idea of FICO’s thinking here. Paying down revolving debts will result in a significantly greater increase in scores than the same amount being applied to installment debts.

Dollar Amounts Don’t Count

It is not the dollar amount of credit card balances that influence scores, but rather the ratio of the balance to the limit. FICO scoring looks at credit cards (revolving accounts) solely as a percentage ratio of the balance to the limit.  The higher this percentage, the lower the scores. Because FICO is designed to assess future risk, it has to assume that every dollar it sees on a credit card balance is a dollar not in the bank. Put another way: FICO assumes if the money was in the bank, the consumer would pay down the credit card to avoid interest costs.

Avoid New Accounts Before Major Purchases

New credit accounts lower scores. The more new accounts a consumer opens in a short time span, the riskier it is to give them one more account.  This effect is separate from – and in addition to – the score decreases from the credit inquiries to open the accounts.  Therefore the rule is: Never open a new account within eight months of a major purchase.