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Credit Report - How Your Credit Score is Determined
Most consumers are aware that they have something known as a
credit report that is used to determine whether or not they would
qualify for a loan. Fewer are familiar with the FICO score, a
creation of the Fair, Isaac, and Co. which distills their entire
credit report down to a three-digit numeral. What, exactly, is
this score? How is it compiled? Can anything be done to improve
it?
The FICO credit score is used by all three major credit
bureaus - Experian, Trans Union and Equifax. They are the
companies that keep track of the credit and lending transactions
of millions of Americans. The score is used to provide, in a
nutshell, a figure that represents the credit-worthiness of a
consumer. That score, which ranges from a low of 300 to a high of
850, is used in many ways by businesses and employers. The score
is used by insurance companies to set rates, landlords to
establish security deposits, and even prospective employers to
determine whether hiring someone is a good risk. Despite the
importance of credit scores in their lives, few Americans
understand how it works.
The score is determined by a variety of factors, each of which
makes up a portion of the score:
- Approximately one third of the score represents the
individual's payment history. Previous loans, and the ability
to pay them are shown in this portion of the score. Both late
payments and failure to pay at all affect this portion of the
score. Those who have paid all of his or her loans on time will
obtain the highest scores.
- Another third of the score is determined by current debts,
and the ratio of debt to the amount of available credit.
Keeping all of your credit cards at or near their limits will
hurt this portion of the score. This seems obvious; those who
are already near their credit limits may have trouble paying
back any future loans.
- The remaining third of the credit score is determined by
three factors - length of credit history, recent credit
applications, and the types of overall credit in the
individual's credit history. The length of the credit history
is the most significant item, as lenders are more suspicious of
borrowers who have not established a pattern of borrowing and
repaying loans. A history of repaid loans goes a long way
towards fortifying this portion of the score. Recent credit
applications, particularly a lot of them, may suggest that the
individual is desperate to borrow more money and may have a
financial problem. Similarly, the types of credit demonstrate
spending patterns and reliability. A credit report containing
all credit cards may be seen as more risky than one with a few
credit cards, a repaid auto loan and an ongoing mortgage.
By seeing how a credit score is compiled, consumers can take
action to keep their scores healthy. A good score helps borrower
obtain loans at better interest rates, and that is something that
everyone can appreciate.
©Copyright 2005 by Retro Marketing. Charles Essmeier is the
owner of Retro Marketing, a firm devoted to informational
Websites, including End-Your-Debt.com, a site devoted to debt
consolidation and credit counseling, and HomeEquityHelp.com, a site
devoted to information regarding mortgages and home equity
lending.
MORE RESOURCES:
Credit - Google News
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