Like the formula for Coca-Cola , the FICO credit scoring formula is a closely guarded secret. The Fair Isaac Corporation, however, does give us a glimpse into the secret sauce from time to time.
For example, Fair Isaac has disclosed what factors go into its scoring model and the weight to be given each factor:
While these factors are helpful, they leave a lot of information out. For example, how does a late payment affect your score? Is it better to have a zero balance on your credit cards? And how exactly will credit inquiries lower your FICO score?
Well, I found some answers to these questions over at the myFICO forums. Apparently, Fair Isaac released the following chart about the FICO formula:
It took me some time to unravel this chart. But if you spend some time with it, you’ll see that it’s packed with some useful information, particularly if you are trying to improve your score.
For example, if you have a late payment on your record, the biggest impact to your score occurs in the first five months. In month 6 you’ll see a 5 point increase, and by month 12 another 10 points. You get the full benefit of clean record after 2 years.
Another thing I found interesting about this chart is the impact carrying a credit card balance has on your score. You get the biggest boost to your score if you carry a balance ranging from $1 to $99. If you have a zero balance, your score actually takes a 10 point hit. Go figure.
Finally, this gives some insight into how credit inquiries affect your score. With four or more credit inquiries, your score can drop 50 points.
Keep in mind that the actual impact on your score depends on many factors not reflected in this chart. And if you want to check your score, there are several free ways to get your credit score.
Rob Berger
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Published or updated April 30, 2012.
{ 9 comments… read them below or add one }
I work at Fair Isaac. Sorry to pop your bubble, but that Powerpoint slide is NOT representative of the FICO scoring formula. It’s part of a training curriculum we use with people outside our company. The slide illustrates a couple of principles we use in some formulas, but it doesn’t represent actual numbers or characteristics of those formulas. You can find good advice for managing your credit score on the company’s myFICO website.
Craig, thanks for your input, and you didn’t pop my bubble. But you may want to take the chart off the myFICO website, as that’s where I found it.
The scoring system is so arcane and so convoluted that a common man does not understand how it works. I am hoping that with time the industry will move to a better method.
The problem is that the industry hasn’t found a better method. And I’m not sure anybody is looking for one, either.
It’s main use is to allow the banks to charge higher interest to people with good credit
I honestly don’t believe that there is a formula. In my vision the raw data goes in, gets crunched and data mined perhaps by a learning algorithm, and a score comes out the other side.
Never in 40 years of working earning a salary living on a budget did I default on an obligation until Wall Street decided to get into the mortgage/banking business. Where was I in and around that time? I was trying to keep my bills paid working like a banshee. With equity finally in my home purchased back in 1989, I had to refinance to pay debt from a divorce. In 2004, I unfortunately found myself in a neg-am. with 3 year pre-pay and by 2007 9% interest. I had no choice but to refinance again but the market was lowering home values $10,000 a month ended up with another bad loan, 7/1 ARM interest only. Since 2009 after realizing there were 2 forgeries on the loan docs, I sent with a police report and forensic analysis requesting a new loan to the lender, district attorney, and attorney general. Lender said, “Inconclusive”. District attorney nver replied and attorney general said hire yourself an attorney, our now Governor Davis. Ha, no attorney would take my cause. Thought I had no other recourse but to short sale so defaulted.
Big Mistake!! Now the New Hamp might have helped me. I have two more years of the 7 years left and I’m current. It was tough and depleted my emergency fund down to one month but I paid back the defaults.
If it’s true that carrying a balance ranging from $1 to $99 is better than a zero balance, then the FICO score is more ridiculous than I even thought. How in the world does not paying off credit card debt, or having it in the first place, prove that you are creditworthy?!
It’s a bit absurd that the mathematical models that dictate life, what people and afford and what they can’t has been obfuscated. Their models dictate what is available credit, and what isn’t. Are these models malleable? Are they mathematical constants? It’s galling that what a real family can or can’t afford is demarcated by these schmucks. What is their secret sauce? Why can an average consumer not know what decisioning is going into their life choices?
Now, these models are not something easy to communicate or replicate. I doubt that most people at Fair Issac understand them (or want to). But I think that in this election year climate such opaqueness just doesn’t fly. We have insurance companies (like Progressive) that (theoretically) reverse-engineer the actuarial tables involved in setting insurance rates.
I can only hope that the mathemagicians at Fair Issac see the writing on the wall, too.