Posts Tagged ‘Experian’

What exactly is a Credit Score (part2)

January 22, 2010

Last time we gave you some information on what components are included on your credit report.  This time we’ll dive a little deeper.

Part 2 – How is a credit score determined?

Have you ever wondered how that three digit number that so much of your life depends on these days is reached?  While no one outside of the organization that designed the number knows exactly, some basic information is known. 

Your credit score is a complex mathematical model designed by the folks at the Fair Isaac Corporation (FICO).  Three different credit bureaus use the data collected to determine an actual score based on this model.  The data is reported by creditors to these agencies – Equifax Credit Information Services, Experian and Trans Union National Disclosure Center.  (You can find links to these agencies on our website.)  A credit score can range from 300 – 850 where, the higher your score the less risk you represent.

Your score is based on five criteria that carry a different ‘weight’ in relation to the whole score.     

1)      Your history of payments accounts for 35% of your total score.  Payment history covers how you pay your bills and if there have been any collections, bankruptcies or judgments. 

2)      The balance and available credit on your accounts factor 30% into your score.  An account near the credit limit poses a much higher risk than one at less than 50% of the limit.

3)      The length of history on any account has a 15% weight.  The longer an account has been open and active, the more time you have had to ‘prove’ yourself. 

4)      The number and type of credit you have accounts for 10%.  More open accounts, has a potential for greater debt and therefore a lower score.  More variety of accounts though can show more experience with different types of credit and generally a higher score.

5)      New credit accounts for the remaining 10%.  Brand new accounts often signify new debt.  Multiple inquiries within a short timeframe can also indicate you are looking into taking on debt. 

In general, lagging payments and multiple new accounts can indicate a problem and therefore reduce your credit score.  The better you are at managing your finances and paying bills as expected, the lower risk you are and that translates into a higher credit score.

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