Credit Scoring: Unlocking the Mystery
The Truth About Your Credit Score
When lenders calculate the risk associated with extending credit to borrowers, they often refer to credit scores provided by the three major credit bureaus (Experian, Equifax, and TransUnion) to help make their decision. The Fair Isaac Corporation (FICO), founded in 1956, provides the bureaus with a carefully crafted formula for determining these scores. Although many factors are assessed when reviewing a borrower's eligibility, credit scores are strongly considered. Knowing your credit score is important, but understanding your score is key to knowing how to improve it. The following percentages, provided by FICO, are used in calculating these scores:
35% - Payment History
Payment history includes details on number of late payments, number of months payments were overdue, and how recent late payments were. Also included are public record items, like collections, judgments, and bankruptcies.
30% - Outstanding Debt
Outstanding debt is the amount of debt owed overall and in relation to your credit limits. The closer you are to being "maxed out," the lower your score will be.
15% - Length of Credit History
This category considers the length of time your accounts have been established, the most recent date of activity, and the length of time you have been building your credit.
10% - Pursuit of New Credit
Pursuit of new credit is a measure of the frequency of inquiries on your credit report. An inquiry is generated each time you apply for new credit. Also included in this category is the number of new accounts on your report and how recently they were opened.
10% - Types of Credit in Use
The "mix" of accounts on your report is another important factor considered in determining your score. Installment loans - loans with level payments and a fixed term such as car loans and mortgages - are generally viewed more favorably than revolving credit, like credit cards.
The Fair Credit Reporting Act requires each of the nationwide reporting companies to provide you with a free copy of your report, upon request, once every twelve months. For a copy of your free report, visitwww.annualcreditreport.com, the only government authorized website. For more information, visit www.myfico.com, a consumer site provided by Fair Isaac Corporation.