Credit Scoring BasicsA credit score is a 3 digit number, generally between 300-850, assigned to you to rate how risky a borrower you are – the higher the score, the less risk you pose to the creditor. It is common knowledge that credit scores are used when you apply for credit, such as a mortgage, a car loan, a student loan, or a credit card. However, more and employers are evaluating credit of existing or prospective employees. And one of the rapidly changing areas of the use of credit scores is in insurance. Now most car and homeowner’s insurance companies are using your credit score to determine how much to charge you, and sometimes even whether to offer you insurance or not. Credit scores are also used by phone and utility companies to determine how much to collect from you for a security deposit. There are three major credit reporting agencies, commonly called credit bureaus. They are Equifax, Trans Union, and Experian. (More in Getting Your Credit Reports.) Lenders such as banks and auto lenders usually pull all three bureau scores, and it is common practice to use the middle of the three scores to determine whether you will be approved for credit, and at what rate. A company called Fair Isaac developed the mathematical scoring models used by the credit bureaus and most financial institutions. The scores used by mortgage and many other lenders are called FICO scores, after Fair Isaac Company. One of the most confusing things about credit scores is that they are not the same. Chances are you will have three different scores from Equifax, Trans Union, and Experian. What is more confusing than this, however, is that you will have different scores from different companies that offer scores. Why - because different companies pull different kinds (models) of credit scores. Most sites on the internet, and even annualcreditreport.com offer the consumer what is called an “educational” score, and this score will most likely be different than the FICO scores that you would get from either Fair Isaac or most mortgage lenders. The following chart breaks down what goes in to determine your credit score, according to Fair Isaac.
Payment History (35%): This is the largest single area that determines your score. This area covers payment information on all accounts, presence of any public records, late payments and collections items. Basically all tradeline information, both positive and negative, goes into determining this part of your credit score. Amounts Owed (30%): This part of the scoring model considers the amount owed on specific types of accounts, number of accounts with balances, ratio of balances owed to credit limits on revolving accounts, and proportion of installment loan balances to the amounts originally owed. Length of Credit History (15%): This part of the scoring model takes into account the length of time you have had specific accounts open, and also measures recent activity of these accounts. The more recent the activity the more it affects your score. New Credit (10%): Number of recently opened accounts, number of credit inquiries, time since credit inquiries, and types of new credit all affect this part of the scoring model. Too many credit inquiries within the past 12 months can lower your credit score. Types of Credit Used (10%): Mix of credit, such as mortgages, car loans, credit cards, finance companies, installment loans, and retail accounts all factor into this calculation. Finance company loans reportedly hurt credit scores, as do too many accounts of a certain type. A good mix of credit is best. Your FICO score only looks at information on your credit report. However, lenders can look at other information when making credit determinations. What is Not in Your Credit Score according to Fair Isaac:
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