How is Your Credit Score Derived?

What is a credit score?

Your credit score is a three-digit number ranging from 300 to 850. These numbers are often referred to as your FICO score(Fair Isaac and Company). FICO is actually the name of the company that developed the software that most credit agencies in the US use and the name has become synonomous with the credit score itself.

Why is it important?

Credit is important when it comes to many important financial transactions in your life from buying a car, house, or computer, to applying for student loans. Your score will determine if you’re able to do these things and how much it’s going to cost you by way of the interest rate you’ll be paying – see graph above for an example of how this works. Additionally, credit has further reaching implications as it may impact the type of job you get as many companies are running credit checks as part of the hiring process.

Where does the score come from?

There are a multitude of credit-scoring models in existence, but there’s one that dominates the market: the FICO credit score. According to myFICO.com, the consumer website for the FICO score developer, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.” Your personalized credit score is generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring. Each lender has it’s own strategy and level of risk they find acceptable, thus there is no single “cut off score”, but as a rule of thumb, 760 FICO score marks the low-end of the “excellent” credit category, where as “very good” scores run from about 725 to 759. Providers of premium credit cards probably won’t want borrowers with a score below 720. Not one mathematical algorithm is applied to everyone, rather, it will depend upon what “scorecard” you’re on. FICO currently utilizes 12 different scorecards. Your unique credit history will determine what scorecard you’re on, whether it be a creditor with few accounts, someone who has a bankruptcy on file, or someone who has deliquincies. Each scorecard weighs individual factors differently. For example, a credit inquiry doesn’t have a set number of points as it has varying implications for someone with a new credit history versus someone with a longstanding credit history.
Payment history: (35 percent) — Your account payment information, including any delinquencies and public records. Amounts owed: (30 percent) — How much you owe on your accounts. The amount of available credit you’re using on revolving accounts is heavily weighted. Length of credit history: (15 percent) — How long ago you opened accounts and time since account activity. Types of credit used: (10 percent) — The mix of accounts you have, such as revolving and installment. New credit: (10 percent) — Your pursuit of new credit, including credit inquiries and number of recently opened accounts.

Good news is you don’t need an 850 to reep the benefits of the lowest rates, a 760 will get you there too.

How do I improve my credit?

First and formost, it’s important that you know what is on your credit report. You can determine this by getting a copy of your credit report. Order a free copy every 12 months from https://www.annualcreditreport.com/cra/index.jsp for each of the three major credit bureaus (TransUnion, Equifax, and Experian) and review each for errors. You can dispute any negative items that you feel are in error or are older than 7 years old. Once that is done, you need to focus on building a new, positive credit history. To improve your credit score under most systems, focus on paying your bills in a timely way, paying down any outstanding balances, and staying away from new debt. Some other tips to consider include limiting the number of credit cards you apply for in a short period of time, only use 10% of your available credit, make small payments towards your bill throughout the month rather than one large payment when it’s due, increase your credit limit to improve your credit utilization ratio, and keep long running cards active and utilize them even it it’s only a nominal amount.

Frank Dolski MBA, ABR, e-PRO Associate Broker Certified Relocation Specialist Previews Luxury Home Specialist Coldwell Banker Hearthside Realtors Ranked #1 In The State of PA in 2012 For Affiliated Coldwell Banker International Realtors 2012 Coldwell Banker International President’s Elite Award 2010-2011 Coldwell Banker International President’s Circle Award 215-803-3237 (mobile) 215-794-1070 x-103 f.dolski@cbhearthside.com www.FrankDolski.Com