Credit Scores

What Makes a Credit Score

Credit Score

Before you start worrying about what number defines your credit report, your FICO score, find our where you stand compared to your peers. Check average credit scores to compare your credit score with others in your state. Once you know what level you are, you can start evaluating the reasons you find yourself where you are. Hopefully by learning the real data that determines your credit score, you will follow the path up to higher scores.

FICO What?

Your personal credit score is a number lenders use to rate your credit worthiness. There are two main scores in use today - FICO and Beacon scores. FICO is much more common than Beacon which is used solely at present by Experian. FICO is simply an acronym for the Fair Isaac Corporation, the company who helped develop the mathematical formula for calculating credit risks.

A Practical System to Negate Losses

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A credit score can cause a lot of headache to the consumer. The truth though, is that credit scores actually help the economic system as a whole by keeping losses down for lenders across the board. Credit scores are used to predict how likely an individual is to repay a new loan based on experience with millions of consumers. More often than not, these numbers are excellent predictors of consumer behavior in handling debts.


Calculating the Score

There are many different computer models that can calculate a credit score. In general, however, the computer model assigns points to information in a credit report. For example, making payments on time every month is positive for the score. Charging the maximum amount available on a credit card is negative. The computer adds the positive and negative points, and the resulting number is a credit score. Credit scores have proven over time to be a reliable indicator of whether or not a consumer would repay a loan, and are not going away anytime soon.

Typical variables that are considered in your score are:

1) Current balances on accounts in good standing: Accounts showing all payments were on time are positive.

2) Length of time accounts established: Long-established accounts are positive

3) Bank revolving accounts: Lack of accounts, or too many can be negative.

4) Reported delinquencies: Negative, especially if severe and recent. These can be unpaid accounts, missed or late payments, and charge-offs.

5) Number of accounts with balances: Too many credit card accounts may have a negative effect on your score.

6) Number of finance company accounts: Loans from finance companies may negatively affect your credit score

7) Recent payment history: An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.

 

8) Proportion of balance to your credit limit: If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score

9) Number of recent inquiries: Not all inquiries are counted. Inquiries by you or creditors who are monitoring your account or looking at credit reports to make "pre-screened" credit offers are not counted.

10) No recent (non-mortgage) account balance information: Can be negative when seeking mortgage loans

11) Legal item filed or collection item reported: Negative, effect decreases with time. Accounts not paid as agreed and/or legal item filed. Your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy

12) Employment and residency: Longer time in your job and at your residence can help your score.

How much weight each of these factors has on your score is not disclosed to consumers because it causes more confusion than insight into the credit scoring process. Everything in credit scoring is relative - one negative item can have a small or large impact on your score depending on your credit history. If you have a long and seasoned history of credit and many established accounts, one late payment would have a small impact on your score. However, if you have a short credit history, one late payment would impact your credit history much more. If you have no established credit, you will have no score. Credit scoring requires that you have at least one account that is older than six months and have at least one account that has been reported to the credit bureau in the last six months.