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All About Credit Scores

Cowboy Bob Hill
Jan 16, 2008
History: Fair, Isaac and Co.(FICO), a company in San Rafael, California was started in 1956 by Bill Fair and Earl Isaac. They began the practice of credit scoring for lenders. Every credit bureau, and most creditors, calculates your credit score using algorithms from FICO or their own software based on the FICO rating system.

What is a credit score? The credit scoring system is meant to present a snapshot of the risk you currently represent to a creditor. Several things in your credit file, how old is your credit history, how many open accounts you have, your loans, mortgages, public records, and others items are used to formulate a three-digit score with a minimum of 300 and a maximum of 850. Usually a creditor will use other factors in combination with your credit score to determine the risk you present to them. The credit score places you into one of 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 category: You become a "sub prime" borrower if your score falls below 680. In this category you will pay higher interest rates for your credit.

Shafted category: You are in the shafted category if your score falls below 560. In this category you may be hit with a security deposit and/or high acquisition fees even if you get credit. Also, your interest rate will most likely fall between 15 and 23%. Most home loans and the majority of new car loans will be out of the question in this category. If you are able to get credit with a low score you will be paying much more in interest and fees. Also, insurance may cost you more and if seeking employment some companies may 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.) What is your current level of indebtedness (amount owed) 30%. Can the borrower pay this new credit and still afford to pay their existing bills? These are the types of questions that most creditors want to know and the answers are almost as important as your previous credit history.

3.) How old are existing credit lines (length of credit) 15%. In general a longer credit history makes for a better score. However, young people, students, or others with short histories can still score high overall as long as the other factors show good because this factor only makes up 15% of your total score. If you don't have a credit history all you can do to improve this part of your score is to open an account, pay on it, and wait.

4.) Recent credit applications 10%. Shopping for credit and finding the best terms to meet your needs is important. However, every time a creditor runs a credit check on you, an inquiry is generated on your reports. FICO calculations take credit shopping into account. Specifically, a group of inquiries which probably represent a search for the best rate on a single loan are treated as a single inquiry (auto or mortgage loan inquiries only). Inquiries that were within 30 days of each other on an Auto loan count as one inquiry. You should avoid unnecessary inquiries as they may hurt your score. Although the system takes into account rate shopping, things like applying for credit card offers will add inquiries to your file and may reduce your score.

5.) Types of credit used 10%. FICO likes a good mix of different types of credit including both installment loans and revolving loans. Mortgages, auto loans, and personal loans are good examples of Installment loans which allow you to repay the loan over a specific period of time with fixed monthly payments. A revolving loan remains fully open as long as you have not reached the limit of the line of credit and allows you to repay the loan without a specific set of payments (credit cards, retail store accounts, and home equity lines of credit). A more detailed review of Credit Scores is available for FREE.
About the Author
To get a Complete Free credit score guide visit Free Credit Score Guide; For financial help from expert Bob Hill visit financial help. http://www.financialhelpforyou.com
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