How Your Credit Is Scored
If you read the real estate section of your local newspaper, you've
probably seen the phrase "credit score" or "FICO score" , but you
might not know exactly what it is.
A credit score is a numerical representation of a person's likelihood
of repayment on a loan based on that person's credit history and
credit habits. The score is derived by applying mathematical
algorithms to information contained in the person's credit report.
Bankruptcies, delinquencies, late payments, the total amount of
available credit and how long it has been established, the total
amount of outstanding debt, the number of open credit lines, the
number of recent credit inquiries by potential creditors, the types of
credit in use and other factors are woven into the calculation.
The national credit reporting bureaus: Experian, Equifax and
TransUnion, calculate credit scores using score cards developed by
Fair Isaac and Co. (FICO), then sell the scored to lenders and other
creditors along with reports. Lenders use the scores, and the
accompanying "reason codes" that flag salient factors in the person's
credit history in tandem with the information from the completed
application package, to decide whether a loan application will be
approved and to determine the interest rate, fees and loan terms that
will be offered to that particular applicant.
The thresholds for credit score rankings vary from lender to lender
based on the individuals lender's risk tolerance. Generally, scores
range from 300 to 900, and most people score in the 600-800
range. A score above 720 is believed to net the most optimal loan
terms, while a score in the 500-600 range is thought to potentially
push the applicant into the subprime lending market. Scores in the
low 600s are the most nebulous when it comes to the interest rate
and loan terms.
Contractual relationships among the credit scoring companies, credit
bureaus and lenders prohibit disclosure of credit scores to
consumers. When a maverick online mortgage banker gave
consumers their scores earlier this year, in violation of its contract,
one of the credit reporting companies cut off the banker's utilization
of its credit reporting services.
Mortage Broker and Real Estate Industry legislation pending in
California would require credit reporting companies and lenders in
the state to reveal loan applicants' credit scores to them along with
the reason codes and general explanatory information about the
credit scoring process. Proponents say such disclosures would
shine some helpful light on the loan application process.
Because of pressure from lawmakers and consumer advocates, Fair
Isaac publishes on its website a list of 22 factors that affect a credit
store. You may view this site at www.fairisaac.com.
Good credit habits can boost your credit score. Here are a few tips.
-Pay all your bills- no matter how small- on time. Even unpaid fines
for overdue library books, if sent to collection, can show up on your
credit report and lower your score.
-Restrict balances on your credit cards to more than 30% of the
maximum available limit. Spread out the balance over two or three
cards rather than consolidating on one card.
-Don't apply for credit cards all over town. Those one-time
discounts from department stores probably aren't worth the damage
to your credit score.
-Close your accounts only after a professional reviews your credit
profile and advises you to close specific accounts.
Arbitrarily closing accounts can skew your credit utilization profile.
-Keep those credit cards you've had fort the longest period of time.
Be patient. Even Bankruptcies and delinquent accounts will drop off
your credit history eventually, but the longer the time since the
delinquency the less negative impact it will have on your score.
Good payment patterns and limited credit utilization are always