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Credit Score and FICO Score

The United States has a very complicated credit system, and it is virtually everywhere. In the center of the system is a credit report, which is basically your entire financial history. You may be stunned by the amount of details it contains about your daily activities involving finances and money.

Based on your credit report, a credit score is calculated to represent your "credit worthiness." Every lender - a credit card company, a mortgage lender or a bank - will almost certainly look at your credit score before granting you any type of loan or credit. The score will also directly impact how much interest you will be charged.

Needless to say, a credit score plays an important role in everyone's life. It is especially true for immigrants pursuing an American Dream, because many are not familiar with the credit concept before arriving in the U.S.

What is a credit score?

A credit score is a three-digital number that indicates your risk level in the eyes of a lender. A higher score means you will be more likely to pay back your debt. When you apply for a credit card, buy a house, lease a car, apply for a small business loan, set up utilities, or even rent an apartment, your credit score will be a key factor, among other things.

What is a FICO Score?

There are many types of credit scores available, but the dominant one that most lenders use is called Fico Score, developed by the Fair Isaac Company (now called FICO). A FICO score ranges from 300 to 850 and is calculated using a mathematical model based on a consumer's financial data, including but not limited to:

  • Payment history: paid as agreed, paid in full, late payment, length of overdue, collection items, bankruptcy;
  • Credit utilization: ratio of debt to available credit, outstanding balance, credit limit, utilization rate;
  • Types of credit and debt: number of accounts, types of accounts (mortgage, consumer loan, revolving, etc.);
  • Credit history: length of having credit;
  • Recent credit inquiries.

Here is a breakdown of how much impact each factor has on your fico score: your payment history (35%), utilization (30%), length of credit history (15%), new credit and recent inquiries (10%) and types of credit used (10%). Race, color, nationality, religion, sex and marital status are prohibited by US law from being included in calculating credit scores. Certain information, such as your age, job, salary, employment history, residence, etc. may be factored in some scores but not in others, and may be considered by lenders regardless of their presence in the scores.

FICO Score Breakdown

How do I know what my credit score is?

You can purchase your Fico Scores/Reports from the FICO's official website at myFICO.com. Additionally, you can also buy your score from the three credit reporting companies: Equifax, Transunion or Experian. If you applied for a loan, the financial institution should send you a letter showing your credit score that was used in consideration of your application. Also, certain credit cards offer the benefit of monitoring your credit history including your score. Keep in mind that sometimes you will get a credit score based on a different model than FICO.

What is a NextGen Score?

NextGen Score is a newer scoring model developed by FICO. All three credit reporting companies provide credit scores based on this model, but market them differently:

  • Experian: FICO Advanced Risk Score
  • Equifax: Pinnacle
  • TransUnion: Precision

Why are my FICO scores different from the credit bureaus?

It is very common to see different credit scores from the three credit bureaus, even if they are all based on the same FICO scoring model. The fundamental reason is that their data on you are different: Each credit reporting company may set different policies on handling your information, such as low long they keep them in the database, and some businesses choose to report your information to some but not all three credit bureaus.

Another important reason is that credit bureaus may modify the scoring model by putting different weight on various factors. They may also change the scoring range. For example, one scoring model used by Experian ranges from 360 to 840, and another by Equifax offers scores from a low of 334 to a high of 818.

Fortunately, lenders usually look at your credit scores from multiple sources in order to more accurately evaluate your credit worthiness. Having said that, however, if you see your score from one credit bureau being significantly lower than others, you should contact them to correct any problems there may exist.

Are there other types of credit scores?

Yes. In fact, there are many. Credit bureaus and many financial institutions have their own scoring models, but they are in no position to rival FICO's dominance. The only real threat is VantageScore, co-developed by three major credit bureaus. However, it is still too new to gain significant market shares from FICO.

Do I have a credit score if I am an international student or working in H-1B status?

Yes. If you own a credit card you will definitely have a credit report, thus a credit score, whether you know it or not. Even without a credit card, your banking activities, payment to utilities bills, dealing with phone, internet or TV providers, may still be recorded.

How to improve my FICO score?

There are some general tips to increase your FICO credit score:

  • Pay your bills on time - the single most important factor to boost any credit score.
  • If you are already late, pay it off immediately and don't wait for the next billing cycle. The length of a late payment is also important.
  • Keep your credit utilization rate low, below 35% of your total credit. This means you want to have more credit available to you, but keep your debt below a certain level.
  • Establish credit history early - this is especially important for new immigrants. Open up a credit card account as soon as you are qualified, but manage it responsibly.
  • Don't apply for too many new credits within a short period of time.
  • If you need to cancel some credit cards, start with the newest ones. Transfer your credit limit to other cards from the same issuer first before closing them.
  • Dispute inaccurate charges through official channels. Don't ignore them, which may invoke a collection action.
  • Check your credit reports regularly (twice a year at least) and correct any errors.

See also: Credit Reports