Credit Score Creation

Last week I shared some Credit Score Basics with you. This week I will provide some of the background on what goes into a credit score. Simply understanding some of these details and managing your finances accordingly can make significant improvements in your credit score and save you considerably in finance charges and other costs determined by the use of your credit score.

Before looking at the factors that go into creating a credit score, it’s important to know that the models used are complex, they can vary from CRA to CRA (credit reporting agency) or from lender to lender, and they can vary for different types of credit, such as credit card, auto loan or mortgage. The weight given to any particular factor can also vary.

With that said, let’s go to the source: The Fair Isaac Corporation (now FICO) reports the following factors and the approximate weight they contribute to your score. The company also notes FICO scores consider only the information on the individual’s credit report but that other lenders may add other factors or items such as age, length of current employment, and so on.

Factors that contribute to creating an individual credit score

• Your history of payment on all types of accounts. Approximately 35% of your FICO score reflects whether you’ve paid bills on time or have been late. How late, how often you’ve been late and how many accounts you’ve been late on is taken into consideration. Any collections, liens, suits, judgments and the like also count and stay on your report for 7 years. Bankruptcies remain on a credit report for 10 years.
• The amount of money you owe. This category considers how much money you owe on how many different accounts. Owing a lot of money on many different accounts may signal that the borrower is overextended. It looks at the proportion available compared to the limits on the account more than the number of accounts. This factor accounts for approximately 30% of your credit score.
• How long you’ve had credit. In general the longer your credit history the better, particularly if you’ve handled that credit responsibly. This factor counts for about 15% of the score.
• How much debt you’ve taken on recently. If you’ve recently opened several credit accounts in a short period of time, that fact tends to lower your score. The scoring also looks at how many requests for your credit report have come in and the nature of the requests. (Requesting your credit report for your own personal review does not count against you nor do checks made by lenders who send out “pre-approved” offers that crowd your mailbox.) This category accounts for about 10% of the score.
• What kinds of credit you have. Approximately 10% of your score is based on the mix of credit you have (credit cards, installment loans, retail accounts, mortgages, small loans from finance companies) and how much of each you have.

For information beyond this summary, check out the extensive information provided under the “Credit Education” button at www.myfico.com. This website provides you the ability to do additional research on any of the items that I have discussed in this week’s blog.

How I can get my credit score

Since credit scores are proprietary, consumers usually have to pay for an accurate report, all those “free” website come-ons typically don’t offer up-to-date or particularly accurate information. If you go it alone, you’ll pay about $15.95 (Fair Isaac’s MyFico.com is a useful service) for your credit score, a copy of one credit report, and access to the FICO Score Simulator (not to be confused with the free Sample FICO Score Simulator) which lets you see how various activities would potentially improve or lower your credit score. You can also purchase your FICO score when you get your federally mandated free credit report as detailed in the next section.

Federally mandated free credit reports are now available

As a protection against identity theft, many consumer experts and security officials are urging consumers to keep close tabs on their credit reports at the three major CRAs. Consumers in all states have the right to a free annual credit report from each of the three major CRAs. These federally mandated free reports are ONLY available at www.annualcreditreport.com or by phoning 877-322-8228, a service run by the three major credit reporting agencies.

Next week I will provide you some simple tips on how to protect your credit score. Special thanks to our staff (especially Sandra Wiuff) here at Rogue for their hard work researching all of this information for you. They have gathered the information from a variety of sources and I have combined it with my experience to give you these brief notes. Please let me know if this information is helpful....askgene@roguefcu.org