About Credit Scoring

What is a Credit Score?
A credit score is a number that reflects your credit risk level, typically with a higher number indicating lower risk. It is generated through statistical models using elements from your credit report; however, your score is not physically stored as part of your credit history on the credit file. Rather, it is typically generated at the time a lender requests your credit report, and is then included with the report viewed by the creditors. Your credit score is a fluid number, and it changes as the elements in your credit report change. For example, payment updates or a new account could cause your score to fluctuate. There are many different credit scores used in the financial service industry. Your score may be different from lender to lender (or from car loan to mortgage loan), depending on the type of credit scoring model that was used.

What's a good score?
Credit scores range from 300 to 900, with the average around 750. Industry experience shows a direct correlation between low scores and high default rates. This means that you may have a hard time convincing a creditor to make you an affordable loan (or any loan at all) if your score is far below average. The 3 bureaus that are used are Equifax, Experian, or TransUnion. For example, a person with good credit might have scores something like 685, 702, and 710.

What factors are used to determine your credit score?
Although we don't know exactly how a credit score is determined, FICO considers the following factors (the approximate weight it assigns to each factor is in parentheses): Although this is a good guide as to what credit scoring companies deem important, keep in mind that some companies may consider different factors.

• Payment history (35%). Your score is negatively affected if you have paid bills late, had an account sent to collection, or declared bankruptcy. The more recent the problem, the lower your score -- a 30-day late payment today hurts more than a bankruptcy five years ago.
• Outstanding debt (30%). If the amount you owe is close to your credit limit that is likely to have a negative effect on your score. A low balance on two cards is better than a high balance on one.
• Length of your credit history (15%). The longer your accounts have been open, the better.
• Recent inquiries on your report (10%). If you have recently applied for many new accounts that may negatively affect your score. Promotional inquiries don't count.
• Types of credit in use (10%). Loans from finance companies generally lower your credit score. FICO says this is most important when there isn't a lot of other information upon which to base a score.

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