Posts Tagged ‘FICO’

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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What exactly is a Credit Score? (part 1)

January 18, 2010

It is nothing new, that a report of your credit is ordered when applying for a loan.  But in recent years, your credit standings are used to determine so much more, like how much you will pay for auto and home owners insurance.  Your credit can also be used by potential employers as a criterion for offering you a job.  That 3 digit number wields a great deal of power these days.  So just how is that number determined?  Maybe more important is how can you control it?

The next few posts will touch of some of these questions to help you understand, what a credit score is, how it is determined, how to build a good credit score, and how to repair a low score.

Part 1 – What goes into a credit score?

Your credit score will include four types of information: public record, credit, credit inquiries and personal.  Information of public record are pieces reported by the judicial system.  It may include judgments, foreclosures, bankruptcies, tax liens, or overdue child support.  Depending on what type of information is disclosed on your report, the data could stay there for 7-15 years.

Credit information is data relating to specific accounts you have or have had in the past.  For each account the date opened, credit limit (or original loan amount), balance, payment amount and payment history will be listed.  Your report will also detail those accounts you are a co-borrower on.  Negative information can remain for up to 7 years from the date it was last reported.  Fortunately positive information can remain indefinitely.

Requests by other creditors to review your credit history will also be listed on your report along with the date requested.  This information is visible to anyone else who may request your credit.  Information for the purpose of extending pre-approved credit offers are only revealed to you and do not impact your overall credit score. 

Personal information includes your name, address, phone number, social security number, date of birth, employer and sometimes your job title.  The report will include both current and past information.

Knowing this, it is easy to see why your credit report is so important to understand and monitor.  The next post will touch on what goes into determining your actual score.