It’s likely you’ve probably seen the letters FICO. You might even use them regularly when talking about your credit score. But do you actually know what they stand for?

Hmm. Federal… Well, the I could be income, right? And the C is definitely credit…

It might surprise you, but FICO stands for Fair Isaac Corporation. You might wonder what on earth Isaac being fair has to do with your credit score, but the letters FICO simply come from the name of the first organization to come up with a credit score. A way to use data about a potential borrower’s credit history to assign them a score that banks can use to determine the level of risk associated with lending that borrower an amount of money.

FICO scores are a pretty important part of the home buying process. But this isn’t a random number assigned to you because of your income bracket. You actually have some control over your score. The decisions you make can improve that number and help you in your journey to buy your dream home. So, let’s take a look at the FICO score.

When Did Credit Scores Appear?

The very first method for calculating a credit score was introduced in 1989. That may seem really recent to some of you, and ages ago to others. But what you’ll notice is that for a good number of you, your parents and their spending habits predate the concept of a credit score.

In the old days, “credit” was an account you had with an individual store owner. Your reputation was based on how well you kept up with making payments on that account. And in a good number of small towns throughout the US, farmers and ranchers only had cash money to pay accounts when the harvest was sold or the cattle went to market.

Homes were either built and paid for with cash, or sometimes you would get a bank loan. If you’ve ever watched the holiday classic, “It’s a Wonderful Life”, this is the entire purpose behind the Savings & Loan concept that is central to the plot in that movie. Go back and watch it if you haven’t seen it in awhile. Pay attention to the run on the bank, and the purpose of the Savings & Loan. It will give you a snapshot of why we have FICO scores, fair credit reporting, and equal opportunity lending laws.

“It’s a Wonderful Life” starring Jimmy Stewart

Unravel the Mystery

According to Investopedia, “to determine credit scores, the FICO weighs each category differently for each individual. However, in general, payment history is 35% of the score, accounts owed is 30%, length of credit history is 15%, new credit is 10%, and credit mix is 10%.”

This may seem somewhat simple, but it isn’t. The key is that the FICO weighs each category differently for each individual. With the addition of new database comparison capabilities, this has actually become very complex! These percentages are a guideline though. And if you’re trying to figure out the best way to build or rebuild your credit, take a look at these numbers and rethink how you utilize your credit.

Version 2.0

Here’s something that might really surprise some of you. Since coming up with the first scoring method in 1989, the FICO has had more than 10 versions of their calculating methods! The most widely used version as of 2021 was still FICO 8. FICO 9 was introduced in 2016 and was more attuned to medical based accounts, but a good number of auto loan and even mortgage lenders still use FICO 5. Investopedia suggests that the Version 10 introduced in January of 2020 might become the new most widely used version due to some really sweeping changes in how we do business in our post Covid world.

I highly suggest clicking on this link and checking out Investopedia’s easy to understand overview of how these multiple versions of the FICO could affect you personally. However, just at a glance, it could help you a lot to understand that when you apply for a credit card, an auto loan, or a mortgage, your credit score number might be different. Not because you made a mistake or did something unexpectedly amazing, but because that lender might be utilizing a different method of the FICO for calculating the number of your score. Another important thing to understand is that your number will likely be within a certain range. If that means your range is on the border of excellent to good, good to fair, etc, this could affect your interest rate and is certainly worth considering.

Your Credit, Your Life

The best way to feel good and secure about your FICO score is to understand it and take control of your credit life. Even if that means coming up with a long term plan, it can still feel really good to be fiscally responsible. And fiscal responsibility is an important step on the way to homeownership. When the moment comes, you want to be able to step up and by the house you want. And when you’re ready to talk home ownership in Los Alamos, give me a call! I would love to chat with you!