RESOURCES
Components Of A Credit Score
A credit score, sometimes called a FICO score, is a complex mathematical model that evaluates many types of information on a credit report. FICO refers to Fair Isaac Corporation, the company that developed credit scoring. Credit scores are used by lenders and service providers to help determine the likelihood a person will repay their debt. They also estimate the probability of timely payments. Credit scores can range from 300 to 850. Generally, the higher the score, the less risk a person represents, so the higher your score the better.
FICO scoring is based on 5 credit categories. The percentages listed identify the "weight" each one carries in relation to the whole score.
History of payment (35%)
Your payment history reveals whether you pay your bills on time, any past-due accounts and the number of months overdue, any accounts referred for collections, bankruptcies or judgments, and other payment related behavior. The better you are about making your monthly payments on time, the better your credit score will be. Late payments demonstrate a higher credit risk.
Balance and available credit (30%)
Not only do lenders want to know the total debt owed, but they are also interested in the ratio between outstanding debt and available credit. An account near or at your credit limit will have a negative impact on your score. However, keeping your balance owed to less than 50% of your limit will have a significant positive impact.
Length of credit history (15%)
The longer your accounts have been open and active, the more credit points you will gain. The less time your accounts have been open, the less time you have had to prove yourself. You need at least 6 months (ideally 9-12 months) of credit activity to develop a credit score.
Number of accounts and types of credit held (10%)
If you have several open credit accounts, you have a greater potential to accrue more debt and your score may be reduced. As for types of credit held, more variety shows you have more experience with different accounts. Higher credit scores usually involve a mix of revolving and installment accounts; and reveal your ability to effectively manage various types of credit.
New credit (10%)
How frequently and recently you have applied for new credit can have a negative impact. Multiple outside inquiries into your credit, especially within a 12-month period, can lower your credit score. Limit the number of lenders you allow to “pull” your credit.
A word of caution, key indicators such as lagging payments combined with multiple recent new accounts, can imply you are about to go into default and are struggling to “stay afloat”. Also, too many inquiries made by lenders and creditors on a younger borrower’s credit will be more harmful than for a more mature borrower.
For more information on credit reports, please visit: http://www.ftc.gov/credit
Addresses for the 3 major credit bureaus are:
Equifax Credit Information Services, Inc
P.O. Box 740241, Atlanta, GA 30374 • 1-800-685-1111
www.equifax.com
Experian
PO Box 949, Allen, TX 75013-0949 • 1-866-397-3742
www.experian.com
Trans Union National Disclosure Center
P.O. Box 97328, Jackson, MS 39288-7328 • 1-800-916-8800
www.tuc.com
