Credit and Credit Scores

How to Make Your Credit History Work for You!         What's a Credit Score? A credit score - commonly called a 'FICO' because it was developed by Fair Isaac & Co. -- decides whether you qualify for various types of loans, credit cards, insurance, and other types of credit. Credit scoring enables lenders to have a fair method of deciding the likelihood that credit applicants will pay their bills. Fair, Isaac & Co. began developing credit scoring in the 1950s. Since then the model that company developed has become the generally accepted standard by which lenders grant credit. A credit score condenses your credit history into a single 3 digit number ranging from 300-850. Credit scores are calculated by evaluating five different credit criteria and assigning points based on how you stack up in these categories. These include: Payment history Length of credit history The amount owed versus the amount of credit available Types of credit used Amount of new credit There are three major credit bureaus--Experian, Trans Union and Equifax - which report credit scores. Some lenders use one of these three scores, while other lenders may obtain reports from all three agencies and use the middle score.

How Your Credit History is Determined

Your FICO score is calculated from the data in your credit report. The chart below shows how important each of the categories of data is in figuring your score.

How Your Credit Profile Is Developed

Lenders use credit bureau information to determine both your ability to pay and your apparent willingness to pay your debts. They look at many factors, such as the ones described below. However, they also consider factors that might have affected your credit score which were beyond your means to control at the time. For example, if you once had very high medical bills due to an accident and were unable to repay them promptly because you could not work, those circumstances would be taken into consideration. If a divorce left you with reduced income to pay bills, that situation might explain certain late payments. While your credit score forms the foundation, a lender will look also at the circumstances causing credit problems to decide your credit worthiness for a particular type of loan. For example, if you have a lower than average credit score, you may find it easier to buy a house than to finance a new car. A mortgage lender knows that the house is likely to grow in value, where the car will decline in value. If a lender should have to repossess a car or a house, the lender knows that the resale of the house will probably cover the amount due on the loan or even exceed the balance due because the home has grown in value. However, a car that is several years old will likely bring less than the car's value on resale, causing the lender to suffer a loss on the transaction. Your Payment History Any history of negative public records - filing for bankruptcy, any judgments against you for an unpaid bill, law suits, wage attachments, and past due payments How long severely delinquent accounts were past due and any recent delinquencies How many of your accounts have been paid on time. Your Debts The total amount you owe on all credit accounts How much you owe on specific types of accounts How many accounts you have with an outstanding balance. For credit cards and revolving credit accounts, how much you owe verses your credit limit The ratio of the original balance on any outstanding loan to the amount still owed Types of Credit Used The different types of accounts you have - including credit cards, car payments, retail store accounts, bank loans, home loans, and others New Credit How much new credit have you applied for in a specific time frame Length of Credit History Time since accounts opened Time since accounts opened, by specific type of account(revolving vs installment) Time since there has been any account activity Is Credit Scoring Fair? Credit scoring is an objective method for determining your ability to repay your bills. It eliminates subjective factors from determining your credit worthiness. Once again, the credit scoring model uses objective criteria which are not influenced by biased credit evaluations.