A credit score, also known as a FICO score, is a three digit number that lenders use to estimate risk. Generally, borrowers with higher credit scores are less likely to default on a loan than those with lower FICO scores.
How are credit reports and scores calculated?
Credit scores are produced by using certain data from your credit report which is weighted to create your personal score. Since the three major credit reporting agencies don't use the same scoring systems, don't be surprised if your credit scores from each one are slightly different. A FICO score is generated using software created by Fair Isaac Corporation -- FICO.
While we don't know all of the criteria used to calculate scores, we do know that the following items of a credit history are most important, and are weighted as shown:
- 35% - Your Payment History Number of accounts paid as agreed
- 30% - Amounts You Owe How much you owe on accounts and the types of accounts with balances
- 15% - Length of Your Credit History Total length of time tracked by your credit report
- 10% - Types of Credit Used Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
- 10% - New Credit Number of accounts you've recently opened and the proportion of new accounts to total accounts
Negative public records or collections
Delinquent accounts:
total number of past due items
how long you've been past due
how long it's been since you had a past due payment
How much of your revolving credit lines you've used--looking for indications you are over-extended
Amounts you owe on installment loan accounts vs. their original balances--to make sure you are you paying them down consistently
Number of zero balance accounts
Length of time since accounts were opened
Time that's passed since the last activity
The longer your (good) history, the better your scores
A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)
Number of recent credit inquiries
The time that's passed since recent inquiries or newly-opened accounts
If you've re-established a positive credit history after encountering payment problems
Credit scores range between 340 to 850. The higher your credit score, the lower the risk a lender believes you will be. As your score increases, the interest rate you are offered generally declines.
Borrowers with credit scores more than 700 are typically offered more financing options and better interest rates, which can save thousands of dollars over the life of a loan.
Credit scores among the US population in 2003:
- Up to 499: 1%
- 500 - 549: 5%
- 550 - 599: 7%
- 600 - 649: 11%
- 650 - 699: 16%
- 700 - 749: 20%
- 750 - 799: 29%
- Over 800: 11%
Don't despair if your credit score is low - over time you can increase your score. It takes some work, but it is worth it in the long run. For more information about how to increase your credit score go to Three Tips to Increase Your Bad Credit Score.
Tags: How_Credit_Reports_are_Calculated
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