How To Understand FICO And American Credit Report Scoring

Understanding the American credit report scoring system is more easily said than done. Luckily, you do not need to have passed an MBA to understand your results, but it will probably help!

The credit history section of the report is the main element and the accounts detailed are known as 'trade lines'.

The American credit report scoring system generally relies on codes that are used to detail payment information. These codes range from 1 to 9. Though that said, people showing 0 are too new to rate, so it is actually possible to range from 0 to 9. The reports also use an I for instalment and R to signify revolving credit (usually credit and store cards).

This means that and I1 or R1 shows that a bill is paid on time, within one month, every month. An R2 or I2 shows that a bill is paid within two months. As the number increases, so generally do your financial problems.

R9, at the other end of the scale, is used to describe debt defaults where the debt is considered to be not possible to collect. If you see an R9, it is probably not worth completing any new loan application forms for some time.

When money is tight in a household, bills and payments tend to become prioritised. This will mean that a family or individual will view payment A as being vital, payment B as being less important and payment C as being something that can wait.

For this reason, the American credit report scoring system can show a multitude of numbers on the same page for the same individual. This would be because they have paid the electricity and water payments on time, the mortgage is one month late, but a Sears store card is four months behind.

Overall scores use a system called FICO, which is named after Bill Fair and Earl Isaac - founders of Fair Isaac. The FICO system was introduced in 1989.

FICO scores range between 300 and 850. If you rate above 800, you are considered to be a low risk and reliable borrower - you scored very highly. Anything above 700 is considered to be good.

However, a score of below 600 will probably cause an application to be turned down or for a higher interest rate to be charged (this is a risk premium).

A new system called VantageScore is also being introduced. This will use a letter system. It is hard to imagine that anything but more confusion can result from yet more complexities!