Do you want the home of your dreams? Would you like a nice dependable car? If the answer is yes, you may want to take a look at your credit score before applying for credit to purchase these and other items. What IS a credit score? A credit score is a three-digit number that banks, lenders, and other creditors use to determine risk and the percentage rate at which money will be loaned to a potential borrower. The higher the credit score, the lower the risk to the creditor. The lower the credit score, the higher the risk to the creditor. We earn our terms depending on how well we manage our credit.
The Fair Isaac Corporation (FICO®) developed the most widely used credit score model. The FICO® score ranges from 300 – 850. The credit reporting agencies Equifax and TransUnion both use their version of the FICO® scoring model. Equifax uses the privately labeled “Beacon” and TransUnion uses the “FICO® Risk Score Classic”. Experian has discontinued using the FICO® scoring model as of February 14, 2009, and instead uses its own scoring model called Vantage ScoreSM. The score ranges from 330 – 830. The Vantage Score was developed by the three national credit reporting agencies- Experian, TransUnion and Equifax.
Knowing there are different scoring models out there and that most lenders use THE FICO® we will outline the important factors that will help consumers know their score by learning how the FICO® scoring works. This information can be found at www.MyFICO.com as well as at our FIT Academy online course: https://credit.org/courses/
Your credit score is calculated and based on these top five factors:
- 35% – Payment History (This includes any public records, e.g. bankruptcies, tax liens, judgments as well as late payments and collections)
- 30% – Outstanding Debt (amount owed on specific types of accounts, balances on accounts compared to the limit, also known as utilization)
- 15% – Length of Credit (age of oldest account, average age of accounts, time since account activity)
- 10% – New Credit (number of recently opened accounts, proportion of accounts that are recently opened, number if credit inquiries, reestablishment of positive credit history following past payment problems)
- 10% – Types of Credit Used (number of accounts in use: presence, recent information on all types of accounts)