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American's faced great financial crisis. As a nation, we struggle
with debt, and it keeps us from achieving a better life. Debt
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REAL PEOPLE ... CARING ABOUT REAL
ISSUES
Credit Score
When applying for credit, lenders review a variety of information
to help them in their decision of whether or not the consumer
is a good risk. They review one or more credit scores of the consumer
applying for credit. A credit score is a number that tells a lender
how likely an individual is to repay a loan, and if their payments
will be made on time. A scorecard or scoring model is used to
determine the overall credit score. This is a mathematical equation
that evaluates many types of information contained in your credit
report. This information is compared to a database of past credit
reports and the scoring identifies what level credit risk you
are.
There are different types of credit scores; the most common scoring
method used is the risk scoring system from Fair Isaac, commonly
known as a FICO score. FICO scoring (Fair
Isaac Company) is an automated rating process for credit reports.
The score is meaningless by itself and must be used in conjunction
with a validated strategy, which may be different for every creditor.
With the FICO system, there are five major categories that comprise
a credit score.
1) Payment History: 35% of score.
This is a huge factor in determining a credit score. Lenders
obviously want to know how a consumer has managed their financial
obligations in the past. Late payments are not a complete negative,
however, they are definitely frowned upon. An overall good credit
score can outweigh one or two instances of late payments. It is
important to realize that having no late payments does not constitute
automatic approval either.
This factor evaluates:
• Payment information. This includes payments on various
types of loans such as Visa, MasterCard, American Express, retail
store credit cards, installment loans, finance company accounts
and mortgage accounts.
• Public record and collection items. This includes bankruptcies,
judgments, lawsuits, wage garnishments and collection items. These
are considered serious, however, older items count less than recent
items.
• No late payments. Each account that shows no late payment
will increase a credit score.
2) Amounts Owed: 30% of score.
Many consumers carry balances on their credit cards, car loans,
mortgages and other types of accounts. Depending on the amounts
owed, it can mean the consumer is overextended, which may lead
to late payments, or no payments at all. This factor determines
if the consumer can currently manage more credit responsibly.
This factor evaluates:
• What is owed. Even if an account is paid in full, a credit
report may still show a balance on that account. The balance on
the consumer's last statement is generally what is shown on their
credit report.
• Who is owed. Part of this score takes into consideration
the amount owed on specific types of accounts, such as credit
cards and loans.
3) Length of Credit History: 15% of score.
A longer, positive, credit history will increase a score. However,
those with shorter credit histories may still get high credit
scores depending on what the rest of their credit history is like.
This factor evaluates:
• The age of accounts. This considers the age of the oldest
account and an average age of all the accounts.
• How often accounts are used.
4) New Credit: 10% of score.
Opening several new accounts, or having many inquiries into credit
history in a short period of time will affect the chances of qualifying
for credit. The FICO scoring system distinguishes between searching
for many new credit accounts and shopping around for the lower
rates.
This factor evaluates:
• New accounts. This considers the age of newest accounts.
• Recent credit history. If there is a period of late payments
and the consumer has re-established their credit, the score will
rise over time.
5) What Types of Credit Used: 10% of score.
This factor usually doesn't play a big part in the lender's decision
in extending credit, however, if there is not a lot of other information
in the other factors, this factor will become more important.
This takes into consideration the mix of credit cards, loans,
finance accounts and mortgages the consumer has.
This factor evaluates:
• Creditors: If the consumer exclusively deals with "D"
lenders, it will put them into a high-risk category even if their
payment history is perfect.
These factors are all considered when establishing the consumers
credit score; no one factor will determine the score. Depending
on the information in the credit report, one factor can play a
more important role in the overall score regardless of the percentage
the particular factor contributes. When a lender receives a credit
score, they will also receive up to four score reason codes. These
codes explain the reasons the score was not higher (if it is low.)
The information within this publication is designed to provide
accurate and authoritative information in regard to the subject
matter covered. If legal advice or other expert assistance is
required, the services of a competent professional should be sought.
All information is deemed accurate and reliable at time of release
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