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Your Credit Score
Your credit score is the three-digit number that lenders obtain from a credit
bureau in an attempt to sum up your credit risk. Your credit score gives lenders
a snapshot of your credit and debt situation and plays a big part of whether or
not credit will be granted, as well as the terms and conditions of your loan or
credit card. Your credit score is determined
solely by the information found in your credit report relating to past and
current credit accounts, and public records such as liens and bankruptcies. When
you apply for credit, lenders take into consideration your credit score, as well
as your income, length of time at your current employment, and the type of
credit you're applying for.
Your credit report contains identifying information about you, including your
name and names used in the past, your address, your social security number, date
of birth, and employment information. Things that do not affect your credit
score include your income, race, religion, sex, age, marital status, and
employment status. It's important to check your credit report at least annually
to be sure that your credit score is calculated based on accurate information.
Some creditors only report to one or another of the three credit bureaus, so you
need to check your report with all three to get your complete credit report.
It's very possible to have information in your report that is outdated or
inaccurate, an account that belongs to someone else with the same name, or even
fraudulent accounts opened by an identity thief. Nobody can find inaccuracies in
your credit report but you, so be sure you take the steps to protect your credit
rating. Go to www.annualcreditreport.com to
get your free credit report from all three credit bureaus. The credit reports
will be free, but you will have to pay for your credit scores. You can purchase
your credit scores from the site at the same time you order your free credit
reports.
The FICO score, developed by Fair, Isaac, and Co., is the industry standard;
75% of lenders and 23 out of 25 credit card issuers base their decision on your
FICO score. Each of the three major credit reporting agencies: Experian,
Equifax, and Trans Union has their own exact method for computing your credit
score, but their credit scoring methods are all based on the FICO scoring model.
Due to each credit bureau integrating their own scoring method, and the
possibility that their report does not contain your complete credit history,
your credit score is likely to be slightly different with each credit reporting
agency. Experian uses the Fair Isaac Score, and credit scores range from
330-830. Equifax developed the Beacon Score, ranging from 340-820. Trans
Union's system is called the Empirica Score, and scores can range from
150-934. Higher is better with all scoring methods, and a credit score of about
700 is the American average.
Fair, Isaac, and Co. does not disclose the exact method of computing your
FICO score, but they do let us know the approximate weight that various factors
carry in determining your credit score.
35% of your FICO score is based on your payment history. Your credit
score can be lowered by late payments, collections and bankruptcies; how
much it can be lowered is dependent on the severity of the delinquencies
and how recent they are. Your score can be raised by showing a long
history of on-time payments.
30% of your FICO score is based on your utilization of available
credit. If you have very high balances on your revolving credit
accounts, such as credit cards, this can lower your credit score.
Keeping a low balance shows you can manage your debt levels and
generally increases your credit score. It's good for your credit score
to keep your revolving balances under 30% of the credit limit, but even
less than that is better. Closing your unused accounts can hurt your
credit score if you have balances on other accounts, because it raises
the amount of credit you are using compared to the amount of credit you
have available to you.
15% of your FICO score is based on the length of your credit history.
This factor includes the age of your oldest and newest account, and the
average age of your other accounts. Closing your oldest accounts can
hurt your credit score if you don't have a long credit history, as well
as opening several new accounts in a short period of time. If you are
new in the credit market, it will take time to establish proof of
responsible credit use. Showing a long history of on-time payments and
responsible credit use raises your credit score.
10% of your FICO score is based on how much new debt you've taken on.
Recent inquiries on your credit report, as well as new accounts are
factored in. Suddenly applying for lots of credit and running up new
debt raises a red flag, and can lower your credit score; it may look
like you've come across financial difficulty and are using credit to
make ends meet. Using credit wisely and consistently after trying to
overcome a negative credit history can raise your credit score.
10% of your FICO score is based on the types of credit used. Though
it's not a key factor in your credit score, your credit score could be
affected by whether you have mortgages, installment loans, and revolving
credit accounts. This portion of your credit score may have more weight
for someone with a limited credit history. The number of each type of
credit account can affect your score, though we aren't given a magic
number for how many is too many.
In addition to the classic FICO scoring method, Fair, Isaac, and Co.
developed its NextGen FICO scoring method in 1999. The NextGen FICO is called
the Pinnacle Score at Equifax, the FICO Risk Score, NextGen at
Trans Union, and the Experian/Fair Isaac Advanced Risk Score at Experian.
The NextGen FICO was designed to better identify a person's true credit risk
while giving less weight to factors that are not thought to have as much bearing
on a person's likeliness to repay. Under the new scoring model, many people have
a better credit score, making it easier for them to get loans and better rates.
Though Fair Isaac touts this new scoring model as a breakthrough in the credit
scoring system, many lenders are hesitant to use it due to unfamiliarity with
the new system, as well as a lack of time-tested proof that the new scoring
model is indeed better than the tried and true classic FICO system. You will
probably see a gradual shift in the use of the NextGen FICO credit score in the
future, but for now, the majority of lenders still go with the original FICO
scoring model because it's what they know.
Sources:
MyFico.com
FairIsaac.com
