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How Your Credit Score Is Calculated

Most consumers don't know what their credit scores are, nor do they know what's on their credit reports. It's important for every consumer to know what their credit scores are and what's on their credit reports so they can improve them. Credit scores are used in conjunction with many services such as, credit cards, mortgage lenders, car loans, and finance companies who allow you to purchase various products like furniture based on credit. Even household services like cable and utility companies will pull your credit prior to accepting you as a customer. Nowadays almost every company offering any type of financing or services that may result in an outstanding bill after the services have ended will want to look at your credit.


Credit Scores & Credit History

Credit scores are usually calculated by a computer model created, most often, by Fair, Isaac & Company (or "FICO," leading to the common generic term "FICO score"). A credit score is intended to be a predictive summary of a loan applicant's credit history. A low score can mean denial of a credit card or loan, or if the application is accepted, a higher interest rate. Also, some lenders use credit scores and other information to set the "price" for processing a loan. Statistically, low credit scores also correlate with other risky behaviors such as delinquent bills.


Credit scores range from 150 to 850, with an average of approximately 750. According to the model, as the score increases, the risk of default decreases. Studies by the loan industry show a direct correlation between low scores and high default rates. Therefore, it may be difficult for an applicant with a low score to convince a creditor to offer an affordable loan or even any loan at all.


A Consumer's credit history can vary from one credit bureau to another as well as credit scores. It is possible to have a high score with one credit bureau (Equifax, Experian, or TransUnion) and a low credit score with another, just as it is possible to have a clean credit history with one bureau and a sullied record with another. However, extremely wide-ranging credit scores are uncommon when comparing the different scores among the three bureaus. Variations of up to 100 points have been noted by some lenders, but ranges of 20 to 25 points are more common. To get an accurate picture, lenders often take the average of all three scores.


Credit Score Calculations
There are many factors affecting your credit score. Below are the main contributing factors that affect credit scores.


• Payment history accounts for 35%. A credit score is negatively affected by a history of late payment of bills, accounts sent to collection agencies, or declared bankruptcy. The more recent the problem, the lower the score. For instance, a 30-day late payment a month ago has more effect than a bankruptcy five years ago.


• Outstanding debt accounts for 30% of your credit score. If the amount owing is close to the consumer's credit limit, this will likely have a negative effect on your overall credit score. For example, a low balance on two cards is better than a high balance on one. 


• The length of credit history accounts for 15% of your credit score. The longer the accounts have been open, the better it is. 


• New credit accounts for 10% of your credit score. If the applicant has recently applied for a number of new accounts, this will negatively affect your credit score. Your FICO Scores take into account several factors, including how you shop for credit via inquiries. An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for 2 years, although FICO Scores only consider inquiries from the last 12 months. FICO Scores have been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk. There are 3 important facts about inquiries to note: Inquiries usually have a small impact, many types of inquiries are ignored completely and the score allows for "rate shopping". (Promotional inquiries do not have any effect nor does requesting a copy of your reports.)


• Types of credit being currently used accounts for 10% of your credit score. For example mortgage loans, retail accounts, installment loans, finance company accounts and credit cards. Loans from finance companies generally lower your credit score. (FICO finds this more important when there is less of other types of credit information about the applicant upon which to base a score.)


Your FICO Scores are calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.


The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact than it would for someone with a much different credit history. In addition, as the information in your credit report changes so does the importance of any factor in determining your FICO Scores.


Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart are for the general population and will be different for different credit profiles.


Obtain Your Credit Report & Scores

You can obtain your credit scores from credit bureaus by paying a fee set by the Federal Trade Commission. However, once a year Federal law allows consumers to obtain all (3) credit reports for free. To receive your free credit reports, go to


Your free credit reports will not include your credit scores. There is a fee to obtain your credit scores from Equifax, Experian, and TransUnion. All credit bureaus have services that will provide you with your score from all (3) bureaus, so there is no need to order your score from each individual credit bureau.When you get your credit scores, remember that more than likely your score will vary from one credit bureau to the next.


Improve Your Credit Score

Fair, Isaac offers several recommendations to consumers seeking to improve their credit scores. Pay bills on time; makeup missed payments and keep all payments current. Maintain low balances on credit cards and other "revolving debt". Maintain the "balance-to-limit ratio" of credit cards below 50%, (but 30% is best).


Credit Tips

• Do not apply for any credit if you are planning on applying for a mortgage loan in the near future.

• Pay off debts rather than transferring them to a new account.

• Apply for a new card if necessary, rather than piling all purchases onto one line of credit.

• Sometimes credit reports contain errors, once you get a copy your reports, review them and fix the problems.
• Do not close a rarely-used credit account. A history of widely-used credit boosts your credit score.

• Do not apply for new unneeded credit cards just to increase your available credit.
• It is usually better to carry smaller balances on several cards than to pile everything onto one card.


If you need to improve your credit first and you need assistance with problems that you feel you cannot fix yourself, find out more about the Mortgage Ready program by clicking here.

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