FICO Score open access – We all win

Help your customers better understand the ins and outs of financial health by sharing FICO Scores you already use to manage their accounts at no additional fees from FICO.

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April is Financial Literacy Month

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His and Her Money: Real-Life Stories of the Journey to Homeownership

Homeownership should not be just a dream, but an achievable goal, and so should having a good FICO Score. This video tells the story of two couples on a journey toward homeownership, and how they converted this challenge into a win. In short: educate yourself, learn about credit, understand how it works. From there, set realistic goals, stick to your budget, adopt good financial behavior, and periodically check your FICO Score.

This journey will bring challenges and surprises, watch the full story on YouTube at Real-Life Stories of the Journey to Homeownership.

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New to Credit

Being new in your credit journey may sound overwhelming at first, but once you understand where to start, it will become an easy path worth taking.

According to the Consumer Financial Protection Bureau, about 26 million people are "credit invisible" in the U.S., meaning they do not have any credit activity with the three national credit reporting companies. Being in this "credit invisible" group may make it harder to receive loans, get approved for low interest credit cards, or even rent an apartment.

Starting your credit journey can be like the chicken and the egg. When applying for a loan, lenders expect you to have credit, but to have credit, you must have some type of credit reported to the credit reporting companies. Luckily, there many ways to start establishing your credit.

One of the ways to start establishing credit is by applying for a secured credit card. It is typically easier to get approved for a secured card than a traditional credit card because you secure the card with a deposit, often equal to the credit limit of the card. For example, a secured card with a $300 deposit will have a $300 credit limit. Your credit score is built from the information in your credit reports saved at the three credit reporting companies, so ensure that your financial institution will report your credit activity after starting to use your secured card.

Another way to start establishing credit is by asking a family member or someone you trust with good credit history to add you as an authorized user on their credit card. The financial institution may start reporting the account information and payment history to the credit reporting companies, and that may get you started with establishing credit history and score.

It will take six months to receive a FICO Score after your financial institution starts reporting the secured credit card or authorized user transactions to the credit reporting companies. FICO Scores are used by 90% of top lenders in the U.S., so they are the gold standard for creditworthiness.

Once you have established your credit and are no longer "credit invisible", start creating good credit habits by paying all your bills on time, keeping your credit usage much lower than your credit limit, and applying for credit only when needed.

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How are FICO Scores and iPhones alike?

Speaking with my mother frequently provides me with inspiration in how to explain FICO Scores to people who are not as familiar with it as I am. In a recent conversation, my mom mentioned that she saw FICO on the news and the story was related to our newest scoring model, with a headline that the newest FICO Score version could result in consumer scores changing. During our call, my mother asserted that she checked her FICO Score at her credit union and that it hadn't changed. She was satisfied with this conclusion, but I was not and was eager to share more about the impact of a new FICO Score version.

When a new iPhone is released, and there's a significant improvement in the camera – that doesn't mean the iPhone in your pocket will also have that feature. You have to actively switch to a new model. Same rings true with FICO Scores. If you want to see your FICO Score calculated on the newest model – you'll have to get it from a source that has switched to the newest version.

Now, you may be thinking, there are some iPhone features that can be upgraded with operating system updates. This is also true for FICO Scores. When underlying data at the credit bureaus changes – for example certain types of judgements were no longer reported – all FICO Score versions were impacted. That's because that data (similar to the iPhone operating system) was changed and so the inputs to the FICO Score changed.

But don't worry! Your "older" iPhone still works. Some people are early adopters, some fast followers, and some are in "if it ain't broke, don't fix it" mode when it comes to new technology. Lenders fall into these categories as well – for lots of reasons – when it comes to the newest FICO Score adoption. Whichever FICO Score version you have access to – from your bank, credit union or any other source is accurate and working still. The important thing is that you keep track of the data within your credit report and continue with positive credit behaviors.

My mother listened to my analogy but I'm not too sure it resonated with her. We concluded the conversation with her telling me that the newest iPhone is now available in green. I think I lost the argument this time. That's OK with me. I'll have plenty of discussions about FICO Scores as soon as anyone learns that I work at FICO! I'll try the iPhone comparison on them too. While I thought my approach to compare FICO Scores and iPhones was really clever – It was not all that unique, as the head of the FICO Score research and analytic team also used the comparison in a recent blog as well. If you want to read his take on it – read on: https://www.fico.com/blogs/innovation-never-sleeps-why-we-redevelop-fico-score

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What's the deal with 30% or less credit card utilization? Myth or Matter of Fact?

Over the last two decades, access to information and financial literacy has grown substantially. With the availability of blogs, articles, online resources, websites, apps, and more, consumers are taking more time to learn more about managing their finances, the importance of managing their credit and attaining a healthy FICO Score. Along with the good and accurate information at our fingertips, the information age undoubtedly circulates a few inaccuracies including the ideal amount of credit to use before negatively impacting their FICO Score.

When it comes to building and maintaining a healthy FICO Score, FICO informs us that there are five key ingredients measured, 1) Payment History, 2) Utilization (Outstanding debt, or the amount of credit a consumer is using), 3) Credit History Length, 4) Pursuit of new credit and 5) our overall Credit Mix.

The largest two categories, payment history, and credit utilization, account for 65% of a FICO Score - meaning management of these two areas is critical to achieving a healthy FICO Score.

Managing payment history, well, that's easy – pay bills on time! But what about credit utilization? That one seems tricky. Is it 30%, 20%, 10%? How much credit should someone use? What's the right percentage?

To start my research, I headed online and began by searching "What's a good credit utilization ratio". Bang! 30%, there it is. The very first article I'm presented suggest that 30% or less is generally the amount of credit I can use on my credit card to maintain a healthy FICO Score. I continue to the article and found that the author points out that 30% of my FICO Score is represented by the amount of credit I'm using. This, in fact, is true.

I continue reading and learn, that generally speaking, good credit utilization is a ratio (or percentage) less than 30 percent. Being the curious researcher, I continue the article and review their sources to understand where the magic ratio of 30% utilization is derived. Ah-ha! I'm pointed to another article, that authoritatively shares "You want to keep your credit utilization under 30 percent." This, unfortunately, is a myth.

As a matter of fact, there is not a magic percentage or maximum ratio of credit utilization required to attain or maintain a healthy FICO Score. In general, the lower the ratio of credit used to credit limit the better, as lower utilization means less credit risk and has a positive effect on a FICO Score. While lenders determine how much credit they are willing to provide, you control how much you use. FICO's research shows that people using a high percentage of their available credit are more likely to have trouble making payments now or in the near future, compared to people using a lower level of available credit.

The researcher in me concludes that whether the myth of 30% utilization or less stemmed from the fact that 30% of a FICO Score is based upon their credit utilization, or simply from years of inaccurate information circulating from trusted advisors or the internet, it's important to understand that the less credit used the better. If you're currently using a lot of credit, aim to reduce or pay off balances. If you need to use your credit card, do so, that's what they're for, but do so responsibly by paying your balances in full, or working to pay them off as fast as possible.

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Repairing My Credit

In my mid-twenties I had a goal of purchasing a condo but was unable to qualify for the loans I needed mostly due to my tremendous amount of credit card debt. When I finally got to a point that I was tired of tracking every dollar of debt and juggling card balances, I contacted a credit counselor. Before I go into the details of that conversation, let's review my background. As a child of divorced parents, I focused on the bright side of the situation and enjoyed the best of both worlds. Dad wanted to make up for the time we weren't together and showered me with gifts, clothes, and foods that Mom wouldn't allow. Mom, on the other hand, was very practical with finances but made life fun and interesting with a lot of quality time together. As I got older, I adopted what I believed to be my dad's philosophy on spending, that "you only live once". Clothes, vacations, gear for all my new outdoor interests were well outside what should have been my budget, paid for on credit.

When credit card companies offered new cards with any number of months of no interest on balance transfers, I quickly applied in the hopes of reducing my debt load. Unfortunately, the strategy backfired; while saving interest in the balance transfer, I more than made up for the deficit with new spending. After a few years of this behavior, I realized the pile of debt wasn't going to get me to the goal of buying my own home. I didn't know what my FICO Score was at the time, but with a frequent rotation of new accounts, short length of average account, and high percent of credit limits owed, my excellent payment history alone could not have made up for the other bad credit habits.

Remember the counselor I mentioned? Well, he offered that one of my options was declaring bankruptcy because it was going to take me a very long time to get out from under the debt. When I heard that, the other values of commitment and responsibility that both my parents shared came shining through. While bankruptcy is a necessary tool for many people, I knew that I had to try using other approaches before considering that option. I just needed to reign in my impulsiveness and replace it with discipline and the ability to say no.

Over the next three years I hunkered down on my spending and continually paid more than I spent, which enabled me to pay off accounts, get out from under most of the debt and start saving for that new home. I also learned around that time that my dad did not spend money in the way that I imagined. Instead, he lived within his means and used credit as credit was needed, a lesson that took me a very long time to learn, but I'm so glad I did.

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The Importance of Financial Resilience

Natural disasters and weather-related work interruptions are a way of life in many parts of the country. But I am born and raised in Northern California. One of the best things about living here is the weather. It's reliably mild. So mild that people who transplant from other areas of the country soon learn that they miss having actual seasons. School, business and economic disruption due to weather is something that many areas in the country have always dealt with – and that's been increasingly the case for our area. Over the past few years, we've had extreme wildfires and related issues that have had ripple effects in our communities and homes. My husband is a golf instructor, so this has impacted us directly – when outdoor activity is canceled – so is his source of income. My household, and many around us, have had to become more resilient to these factors. Looks like California is playing catch up with so many other areas. So what does that mean… become more resilient?

Obviously, there's a budget aspect of this. Spend less, save more. Live within our means. Always easier said than done. But there's truth to it. We always prioritize our known payments first – mortgage, cars (and everything that goes with those!). We use credit judiciously. Pay our cards lower when we can – always make minimum payments regardless. Being educated about how FICO Scores work and what lenders expect of customers is critical. Understanding that making the payment is key for our long-term options is helpful in prioritizing that bill. There's an understandable appeal to just skip a payment and make it up next month when some income has returned. It may feel like it will all even out, but a missed payment can have a major impact. So, while it doesn't feel great to make a minimum payment and watch the balance due grow –it's way better than the alternative – late fees, rate increases, denied applications down the road. For us, just a few frozen pizzas instead of delivery, and some movies at home can make a difference.

Is that really being more resilient?

Given that we can bounce back a couple of months later with some bigger payments and a restored focus on building our savings for next time – I'd say yes. And I don't mean to make light of the struggle, situations where you have to give up much more than pizza and movies are a reality for many people. We have a dual income household, which is not the case for everyone. But everyone can understand the long-term impacts of short-term decisions and use that information to make deliberate decisions. Improving your understanding and knowledge of FICO Scores may have a long-term impact and help everyone be more resilient.

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