History: Fair, Isaac and Co. (FICO)is a San Rafael, California Company founded in 1956 by Bill Fair and Earl Isaac. They pioneered the field of credit scoring for financial companies. Every credit agency, and most lenders, calculates your credit score using software from FICO (Beacon) or in-house software based on the FICO rating system.
What does your credit score mean? This rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between 300 and 850. Usually a lender will use a combination of your credit score with other factors when determining your risk. The score places the borrower in one of three main categories: Prime, sub-prime, and shafted.
Prime: If your credit score is above 680, you are considered a "prime borrower" and will have no problem getting a good interest rate on your home loan, car loan, or credit card.
Sub-prime: If your credit score is below 680, you are "sub prime", and will likely pay a much higher interest rate on your loan.
Shafted: Below 560 is the shafted score. You may still get a credit card but you will likely be hit with a security deposit or high acquisition fees. Also, your interest rate will likely be between 15 and 23%. At this score, you can forget about most home loans and the majority of new car loans. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates and it may prevent you from getting a job with many companies.
How do your scores get calculated? Each credit agency may calculate your FICO score by different methods. Your score from a credit agency does not come directly from FICO. Each agency has its own twists and name. "Beacon" is used by Equifax, "Empirica" is used by Trans-Union, and "Experian/Fair Isaac" is used by Experian. Instead of FICO scores these scores may be referred to as "Bureau Scores."
Every time your report changes your score will also change because agency data determines your score. The calculation of your score takes into account many categories of information. No one single piece of information or factor makes up your score. As the information in your credit report changes the importance of one or more factors may change in your FICO score. Lenders look at many things when deciding on credit. These things include your income and the kind of credit you are seeking. These items are not reflected in your FICO score as it only evaluates the information retained by the credit reporting agency.
What are the factors that affect your credit score? Five main factors are used in calculating your overall credit score.
1.) Previous credit performance (payment history) 35%. A lender wants to know what your payment history is like. Your payment history is just one piece of information used in calculating your score, although it can be very important.
2.) How much debt do you already have? (amount owed) 30%. Can the borrower afford to pay their existing bills and still pay this new credit? Most lenders want to know the answers to these types of questions and these answers are almost as important as your previous credit history.
3.) How long have you had your existing credit? (age of credit) 15%. The longer credit history the better score in general. This does not mean that people with short histories, young people, or students can't still have a high overall score as long as the other factors are good as this factor makes up only 15% of the total score. With no credit history you need to open an account, pay on it, and wait in order to improve this part of your score.
4.) Recent credit activity 10%. If you Shop for credit and to find the best rates to meet your needs that's good, but, every time a lender checks your credit, an inquiry is produced on your credit reports and this can be negative. However, FICO calculations take credit shopping into account by treating group of inquiries which probably represent a search for the best rate on a single loan as a single inquiry (auto or mortgage loan inquiries only). Inquiries that were within 30 days of each other on an Auto loan count as one inquiry. You should avoid frivolous inquiries as they may hurt your score. Things like applying for credit card offers will add inquiries to your file and may reduce your score even though the system takes into account rate shopping.
5.) The credit type mix 10%. FICO likes a variety of different types of credit including installment loans and revolving loans. Good examples of Installment loans are Mortgages, auto loans, and personal loans which allow you to repay the loan over a specific period of time with fixed monthly payments. Revolving credit remains fully open as long as the limit has not been reached and it allows you to repay without specific fixed payments (home equity lines of credit, credit cards, and retail store accounts). A more detailed review of Credit Scores is available for FREE.
Credit scores are the financial measurement to determine your financial creditworthiness. Lenders like banks and credit card companies use these credit scores to know your financial ability. Thus is important to maintain your good credit scores. Let review the 3 top credit mistakes which you may make and harm your credit scores:
1. Missing Payment
Your credit score is count based on your credit history and how you have managed your current and pass credit obligations. Many lenders will use this piece of information to predict your future miss payment probability and it is important factor to approve or reject any of your loan application. There are three ways that missing payments will hurt your credit scores. They are:
How Frequent are Your Late Payments? - Sometimes you may make your payment late due your busy schedule. But if you do it frequently, it may hurt your credit score seriously. Dont make the late payment as your habit; maintain your good credit behavior with your timely payment.
How Recent is Your Late Payments? - The scoring model are designed to predict how you are going to pay your bills in the subsequent 24 months; your recent late payment records especially with the last 2 years weight a lot in your credit scoring. If you have lot of late payment records in your past 2 years, it is predicted that you will likely to miss more payment in the next 2 years. As such, your score will suffer.
How Severe is Your Late Payments? - The severity of your late payment also plays a big part in your credit scores. The 90 days late payment hurt your credit score more if compare to 14 days late payment. If you are too busy to make your payment on time, dont late by too late because give a great negative impact on your credit scores.
2. "Settle" with your lenders on your debt Settling your debt with your creditors with less than the amount you owe them will create negative information called "deficiency balance" in your credit report. This may happen when you have unbearable debt and you are getting a debt consolidation service to negotiate with your lenders to outcome an agreement to settle your debt with some reduced amount. You may happy that you didnt have to pay the full amount. However, the lender will report that remaining amount as "deficiency balance" to the credit bureaus as a negative item. A deficiency balance is considered just as negatively by credit scoring models as any other severe late payments. In your debt consolidation process, if you can arrange a deal with your lender so that they will NOT report the deficiency balance then that will be your best course of action; if not, your credit will suffer for 7 years.
3. Over Utilization of Your Available Credit Card Limits
Your credit scores can be affected with your high balance on your credit card. ." Over utilization is the practice of running up balances too close to your credit card limits. For example, if you have a Visa card with a credit limit of $10,000 and a $5,000 balance you have a utilization percentage of 50% because you are using 50% of your credit limit. The higher the utilization percentage the fewer points you will earn for your credit scores. If paying your cards off every month is unrealistic then try your best to keep that percentage as low as possible to maintain your good credit scores.
Try to best to avoid the above credit mistakes to have a good credit score in your credit report.
Both Cowboy Bob Hill & Cornie Herring are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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