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YOUR FICO SCORE IS A VITAL PART OF YOUR CREDIT HEALTH
When you’re applying for credit-whether it’s a credit card, a car
loan, a personal loan, applying for a job, renting a home or a
mortgage-lenders want to know your credit risk level. To help them
understand your credit risk, most lenders will look at your FICO score,
the credit score created by Fair Isaac Corporation which is available
from all three major credit reporting agencies.
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What is a credit score?
A
credit score is a number lenders use to help them decide: “If I give
this person a loan or credit, how likely is it that I will get paid back
on time?” A score is an estimate of your credit risk based on a snapshot
of your credit report at particular point in time.
The
most widely used credit scores are FICO stores. Lenders use FICO scores
to help them make billions of credit decisions every year. Fair Isaac
develops FICO scores based solely on information in consumer credit
report maintained at the credit reporting agencies. This booklet can
help you improve your credit health by helping you understand how credit
scoring works.
Your
credit score influences the credit that’s available to you, and the
terms (interest rate, etc.) that lenders offer you. It’s a vital part
of your credit health.
Understanding your Fico score can help you manage your credit health.
By knowing how your credit risk is evaluated, you can take actions that
will lower your credit risk-and thus raise your credit score-over time.
A better FICO score means better financial options for you.
HOW
FICO SCORES HELP YOU
FICO scores gives lenders a fast, objective measurement to your credit
risk.
Before the use of scoring, the credit granter process could be slow,
inconsistent and unfairly biased. Credit scores-especially FICO scores,
the most widely used credit scores-have made big improvements in the
credit process.
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HOW FICO SCORES WORK
Along
with the credit report, lenders can also buy a FICO based on the
information in the report. That FICO score is calculated by a
mathematical equation that evaluates many types of information from your
credit report at that agency. By comparing this information to the
patterns in hundreds of thousands of past credit reports, the FICO score
identifies your level of future credit risk.
In
order for a FICO score to be calculated on your credit report, the
report must contain enough information-and enough recent information-on
which to base a score. Generally, that means you must have at least one
account that has been open for six months or longer, and at least one
account that has been reported to the credit reporting agency within the
last six months.
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YOU HAVE THREE FICO SCORES
In
general, when people talk about “your score,” they’re talking about your
current FICO score. But in fact there are three different FICO score
developed by Fair Isaac-one at each of the three main US credit
reporting agencies. And these scores have different names.
EQUIFAX- is called BEACON score
EXPERIAN- is called FAIR ISAAC RISK MODEL
TRANSUNION- is called FICO RISCK SCORING, classic
The
FICO scores from all three credit reporting agencies are widely used by
lenders. The FICO scores from each credit reporting agency considers
only data in your credit report at that agency. Fair Isaac develops all
three FICO scores using the same methods and rigorous testing. These
FICO scores provide the most accurate picture of credit risk possible
using credit report data.
WILL YOUR CREDIT SCORE BE DIFFERENT?
FICO
scores range form 300 to 850. Fair Isaac makes the scores as consistent
as possible between the three credit reporting agencies. If your
information was exactly identical at all three credit reporting
agencies, your scores might still differ because the model for the three
credit reporting agencies are developed separately. However, all three
scores would be within few points of each other.
Some
people will find that their scores at the different bureaus will vary by
more than few points. The difference in scores can be caused by a
couple of different factors:
-
The way lenders and other
businesses report information to the credit reporting agencies sometimes
resulting in different information being in your credit report at the
three agencies.
-
The agencies may also
record the same information in different ways. Even small differences
in the information at the three credit agencies can affect your score.
Since
lenders may review your score and credit report from any of the three
reporting agencies, it’s a good idea to check your credit report from
all three and make sure they’re all accurate.
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FIVE PARTS OF YOUR FICO
CREDIT SCORES
-
PAYMENT HISTORY
-
AMOUNT OWED
-
LENGTH OF
CREDIT HISTORY
-
NEW CREDIT
-
TYPES OF
CREDIT IN USE
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1. PAYMENT HISTORY
What is your track record?
Approximately 35% of your FICO score is based on this category.
The
first thing any lender would want to know is whether you have paid past
credit accounts on time. This is also one of the most important factors
in a credit score.
Late
payments are not an automatic “score-killer.” An overall good credit
picture can outweigh on or two instances of, say, late credit card
payments. But having no late payments in your credit report doesn’t
mean you will get a “perfect score.” Some 60%-65% of credit reports
show no late payments at all. Your payment history is just one piece of
information used in calculating your FICO score.
Payment information on many types of account.
These
will include credit cards (such as Visa, MasterCard, Amex) retail
accounts (credit from stores where you do business, such as department
store credit cards) installment loans (loans where you make regular
payments, such as car payments) finance company accounts and mortgage
loans.
Public record and collection items-reports of events such as
bankruptcies, foreclosures, suits, wage attachments, liens and
judgments.
These
are considered quite serious, although older items and items with small
amounts will count less than more recent items or those with larger
amounts. Bankruptcies will stay on your credit report for 7-10 years,
depending on the type.
Details on late or missed payments (delinquencies) and public record and
collection.
The
FICO score considers how late they were, how much was owed, how recently
they occurred and how many there are. A 60-day late is not as
significant as a 90-day late payment, in and of itself. But recent and
frequency count too. A 60 day late made just a month ago will affect a
score more than a 90-day late payment from five years ago.
How many accounts show no late payments.
A
good track record on most of your credit accounts will increase your
FICO score.
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2. AMOUNT OWED
How much is too much?
Approximately 30% of your score is based on this category.
Have
credit accounts and owing money on them does not mean you are high-risk
borrower with a low FICO score. However, when a high percentage of a
person’s available credit has already been used, this can indicate that
a person is overextended, and is more likely to make some payments late
or not at all. Part of the science of scoring is determining how much
is too much for a given credit profile. Your FICO score takes into
account.
The amount owed on all accounts.
Note
that even if you pay off your credit cards in full every month, your
credit report may show a balance on those cards. The total balance on
your last statement is generally the amount that will show in your
credit report.
Whether you are showing a balance on certain type of account.
In
some cases, having a very small balance without missing a payment shows
that you have managed credit responsibly, and may be slightly better
than carrying no balance at all. On the other hand, closing unused
credit accounts that show zero balances and that are in good standing
will raise your FICO score.
How many accounts have balance.
A
large number can indicate higher risk of over-extension.
How much of the total credit line is being used on credit cards and
other revolving credit accounts.
Someone closer to maxing out on many credit cards may have trouble
making payments in the future.
How much of installment loan accounts is still owed, compared with the
original loan amount.
For example, if you borrowed $10,000 to buy a car and
you paid back $2000, you owe more than 80% of the original loan. Paying
down installment loans is a good sign that you are able and willing to
manage and repay debt.
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3. LENGTH OF CREDIT HISTORY.
How established is yours?
Approximately 15% of your FICO score is based on this category.
In
general, a longer credit history will increase your FICO score.
However, even people who have not been using credit long may get high
FICO score, depending on how the rest of the credit report looks. Your
FICO score takes into account.
How long your credit accounts have been established
Your
FICO score considers the age of your oldest account, the age of your
newest account and an average age of all your accounts.
How long specific credit accounts have been established.
How long it has been since you used certain accounts.
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4. NEW CREDIT
Are you taking on more debt?
Approximately 10% of your FICO score is based on this category.
People tend to have more credit today and to shop for credit-via the
internet and other channels-more frequently than ever. FICO scores
reflect this reality. However, research shows that opening several
credit accounts in short period of time does represent greater
risk-especially for people who do not have a long established credit
history.
Multiple credit requests also represent greater credit risk. However,
FICO scores do a good job of distinguishing between a search for many
new credit accounts and rate shopping for one new account. Your FICO
score takes into account.
How many new accounts you have.
Your
FICO score looks at how many new accounts you have by type of accounts.
(for example, how many newly opened credit cards you have) . it also may
look at how many of your accounts are new accounts.
How many recent requests for credit you have made, as indicated by
inquiries to the credit reporting agencies.
Inquiries remain on your credit report for two years, although FICO
score only consider inquiries from the last 12 months. FICO scores have
been carefully designed to count only those inquiries that truly impact
credit risk.
Length of time since credit report inquiries were made by lender.
Whether you have a good recent credit history, following past payment
problem.
Re-establishing credit and making payments on time after a period of
late payment behavior will help to raise a FICO score over time.
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5. TYPES OF CREDIT IN USE
Is
it a “healthy” mix?
Approximately 10% of your score is based on this category.
The
score will consider your mix of credit cards, retail account,
installment loans, finance company accounts and mortgage loans. It is
not necessary to have one of each, and it is not a good idea to open
credit accounts you don’t intend to use. The credit mix usually won’t
be a key factor in determining your FICO score-but it will be more
important if your credit report does not have a lot of other information
on which to base a score. You FICO score takes into account.
What kind of credit accounts you have.
Do
you have experience with both revolving and installment type accounts,
or has your credit experience been limited to only one type?
How many of each.
Your
FICO score also looks at the total number of accounts you have. For
different credit profiles, how many is too many will vary depending on
your overall credit picture.
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WHAT FICO SCORES IGNORE
Fico
scores consider a wide range of information on your credit report, as
shown above. However, they do not consider the following:
- Your
race, color, religion, national origin, sex and marital status.
- Your
age
- Your
salary, occupation, title, employer, data employed or employment
history.
-
Where you live
- Any
interest rate being charged on a particular credit card or other
account.
- Any
items reported to child/family support obligations or rental agreement
- Any
information that is not proven to be predictive of future credit
performance.
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