The details of credit scoring models used by the major credit bureaus are closely guarded trade secrets, owned by the companies that have developed the scoring models.
The best known and most widely used scoring model, the FICO score, which judges your credit on a scale from 300 to 850, was developed by the Fair Isaac Corp., and is used with slight variations by the three major credit bureaus: TransUnion, Experian, and Equifax. Because the complexity of the statistical analysis used in credit scoring, and the fact that the scoring algorithms are not publicly available, you cannot precisely figure your own credit score. However, Fair Isaac has made public the general criteria it uses in calculating credit score. So based on information in your credit report, you should be able to tell which items in your report are helping or hurting your credit score.
There are five key factors that go into calculating your credit score, with certain items carrying more weight than others. These factors are as follows:
1. Payment history
Payment history counts for approximately 35% of a score. It is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area.
If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.
2. Total debt and total available credit
Total debt and total available credit counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred.
If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently.
Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt-to-credit limit ratio low.
3. Length of positive credit history
Length of positive credit history counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.
4. Mix of types of credit
Mix of types of credit counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.
5. New credit applications
The number of new credit applications you have recently completed accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.
While you cannot calculate your own credit score accurately, you can review your credit report on the five factors named above to get an idea of whether the accounts listed on your credit report are hurting or helping your credit score. You can then take action to improve any potential problems, such as paying down your balances or paying off collection items.
Generally speaking, if you are carrying more than $5,000 in credit card debt or are struggling with credit card or revolving debts, you should solve this problem first. Apply for help with one of Bill’s approved debt help partners.
Items not in a FICO score
Factors such as age, sex, income, and length of employment have no direct affect on your credit score, and are not considered when the bureaus calculate your score. Keep in mind that for most lenders, your credit score is only one aspect, albeit an important one, of your overall "credit worthiness," meaning the creditor's view of your ability to repay a loan.
Your income, for example, is not considered in the calculation of your FICO score, but most lenders will ask what you earn to analyze your ability to repay the loan. Even if you have an 800 FICO score, if your income is only $10,000 per year, a lender will probably not loan you a large sum of money, because despite your exemplary credit habits as measured by your FICO score, the lender can see that you probably cannot afford to repay the loan.
Credit score range: What is a good FICO score?
FICO scores range between 300 and 850, with the average U.S. credit score being 723.
According to Fair Isaac, a credit score above 700 places you in the low credit risk category (perfect or "A" credit), meaning you should qualify for the best interest rates, depending on other factors such as income. A score between 690 and 600 is considered a moderate credit score, and many people say you are "Alt-A" if you are between about 650-680. This means that while you will not receive the best interest rates, you should still be able to borrow at reasonable rates.
A score below 600 generally means that you will be considered a relatively high credit risk, and your interest rates will probably be quite a bit higher than a consumer with a better credit score. A score below 550 is generally considered poor credit; a score this low will likely prevent you from obtaining many loans, and those you can obtain will carry high interest rates and fees.
There are several other scoring models, such as the Vantage Score and the Beacon score, which lenders use when making loan decisions, so the ranges mentioned above are not absolute. However, Fair Isaac is the most common scoring model, so the information I provided should serve a good guide.
How to Improve a FICO Score
Here are five steps to improve a credit rating:
- Pay your debts on time. Delinquencies harm a credit score.
- Keep revolving lines below 25% utilization. Do not “max out” any loans or cards.
- Diversify you credit portfolio. If, for example, you have only a Visa, MasterCard, or Discover card, get a department store credit card or card from a gasoline retailer. Make your payments every month. Leave a small balance every once in a while to show that you are able to handle debt on more than one account.
- Keep your oldest credit account active. Remember point number three "Length of positive credit history" discussed above.
- Pull your credit report and contest any inaccurate information. Follow the dispute procedure to corrected your credit file. Go to the Bills.com debt self-help center for sample dispute letters. The credit bureaus must follow the rules set forth by Congress in the Fair Credit Reporting Act (FCRA).
If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by the Bills.com credit information page.
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