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Home | Finance | Credit


What Is Your Credit Score All About?

By: Cowboy Bob Hill
 

History: Fair, Isaac and Co. (FICO)is a San Rafael, California Company founded in 1956 by Bill Fair and Earl Isaac. They pioneered the field of credit scoring for financial companies. Every credit agency, and most lenders, calculates your credit score using software from FICO (Beacon) or in-house software based on the FICO rating system.

Why a credit score? Credit scoring is used to present a shorthand of the risk you currently represent to a lender. Many things in your credit file, such as how many open accounts you have, how long have you had a credit history, your mortgages, loans, any public records, and others items are used to calculat a three-digit score ranging from 300 and to a maximum of 850. Many times a lender will combine other factors with your credit score to decide on whether to give credit or not. Your credit score places you into one of basically three categories: Prime, sub-prime, and shafted.

Prime category: You are considered a "prime borrower" if you have a credit score above 680 and you won't have any problems getting good interest rates on your credit cards, car loans, or home loan.

Sub-prime: If your credit score is below 680, you are "sub prime", and will likely pay a much higher interest rate on your loan.

Shafted: If you fall below 560 you are in the shafted category. You may still get a credit card but you may be hit with a security deposit and/or high acquisition fees. Also, your interest rate will more likely fall between 15 and 23%. In this category, you can forget about most home loans and the majority of new car loans. If you do get credit you will pay much, much more in higher interest and unnecessary fees. Your insurance rates may be higher and some companies will not hire you.

How do your scores get calculated? Each credit agency may calculate your FICO score by different methods. Your score from a credit agency does not come directly from FICO. Each agency has its own twists and name. "Beacon" is used by Equifax, "Empirica" is used by Trans-Union, and "Experian/Fair Isaac" is used by Experian. Instead of FICO scores these scores may be referred to as "Bureau Scores."

Every time your report changes your score will also change because agency data determines your score. The calculation of your score takes into account many categories of information. No one single piece of information or factor makes up your score. As the information in your credit report changes the importance of one or more factors may change in your FICO score. Lenders look at many things when deciding on credit. These things include your income and the kind of credit you are seeking. These items are not reflected in your FICO score as it only evaluates the information retained by the credit reporting agency.

Which factors affect your credit score? There are 5 factors that are used in calculations to determine your overall credit score.

1.) Your credit performance history (payment history) 35%. A lender wants to know how you have paid in the past. Your payment history is just one piece of information used in calculating your score, although it is very important.

2.) Current level of indebtedness (amount owed) 30%. Can the borrower pay and still afford to pay their other bills? These are the types of questions that most lenders want to know and the answers are almost as important as your previous credit history.

3.) Amount of time credit has been in use (length of credit) 15%. Generally, the longer the credit history the better the score. However, this factor only makes up 15% of your total score so even young people, students, or others with short histories can still score high overall as long as the other factors show good. If you are new to credit then there is little you can do to improve this part of your score except to open an account, pay on time, and be patient.

4.) Pursuit of new credit 10%. Consumers can now shop for credit and find the best terms to meet their needs. Each time someone runs a credit check on you, it creates an inquiry. Fair Isaac's calculations account for these new trends. Specifically, they treat a group of inquiries, which probably represents a search for the best rate on a single loan, as though it were a single inquiry (note: this only applies to auto or mortgage loan inquiries). Auto loan inquiries that were within 30 days of each other count as one inquiry. As a reasonable measure you should avoid unnecessary inquiries. The system is designed to take into account rate shopping but things like applying for credit card offers will add inquiries to your file.

5.) The credit type mix 10%. FICO likes a variety of different types of credit including installment loans and revolving loans. Good examples of Installment loans are Mortgages, auto loans, and personal loans which allow you to repay the loan over a specific period of time with fixed monthly payments. Revolving credit remains fully open as long as the limit has not been reached and it allows you to repay without specific fixed payments (home equity lines of credit, credit cards, and retail store accounts). A more detailed review of Credit Scores is available for FREE.

Article Source: Main Articles

To get a Complete Free credit score guide visit Free Credit Score Guide; For financial help from expert Bob Hill visit financial help

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