Credit Scores (Part 1)

March 17, 2016

In this series on Credit Scores, I will discuss the various types of credit reports and the factors which influence your credit score. Credit reports consist of detailed information regarding an individual’s current and past financial obligations. Credit scores are essentially a numerical grade of the information contained within the credit report. These scores are used by credit card issuers, auto lenders, mortgage companies, and other lenders to judge the applicants financial responsibility prior to issuing credit. Remember you can obtain your free credit report from each agency one time per year at www.annualcreditreport.com. Contact the attorneys at Fears Nachawati with any questions.

TYPES OF CREDIT SCORES

FICO Scores – FICO (otherwise known as the Fair Isaac Corporation), created the first credit scores in the 1950s. Since their creation, FICO scores remain the most widely used scoring model by lenders with over an estimated 90 percent of the market share in 2010 of scores sold to firm for use in credit related decisions. Although there are different FICO scoring models, the scores generally range from 300 to 850.

Credit Reporting Agency Scores – Credit Reporting Agencies (Equifax, Experian and TransUnion) each utilize their own scoring model, which causes scores to vary among the three main agencies. These scores were originally created to predict performance on credit obligations. However, today these scores are primarily used as educational scores for consumers. Each agency uses differing ranges of scores. For example:

Equifax’s Credit Score ranges from 280 to 850.

Experian Plus Score ranges from 330-830.

TransUnion TransRisk New Account Score ranges from 300-850.

VantageScore – VantageScore is produced by VantageScore LLC, which is a joint venture of the three credit reporting agencies. It was developed as a competitor to FICO. VantageScore results range on a scale from 501-990.

CALCULATING THE CREDIT SCORE

While there are multiple credit scores, as noted above, the credit score of primary concern is the FICO score. The FICO score is generally based on five categories, each of which are weighted to have a varying impact on the overall score. These categories, sorted by overall importance, are:

-Payment History (35%)

Credit payment history is one of the most important factors in a FICO score. Lenders, who want to know whether you’ve paid past credit accounts on time, place a heavy reliance on payment history. While a few late payments may not have a major impact on the credit score, numerous late payments, or a history of routinely late payments, will significantly drop the credit score. FICO specifically looks at how late the payments were made, how much was owed, how recently the late payments occurred, and how many late payments are on the account. Typically, late payments are reported as either 30 days late, 60 days late, 90 days late, 120 days late, 150 days late, or a charge off. It is important to note that when a debt is “charged off,” it does not mean that debt is no longer owed.

Account types considered for payment history include credit cards, retail accounts (i.e. department store credit cards), installment loans, finance company accounts, and mortgage loans. Public records and collection items also fall under the payment history category, which include the filing of bankruptcy. Paying accounts on time, or a good track record on most of your accounts, will have a positive influence and increase your credit score.

Amounts Owed (30%)

The second leading influence on credit scores is the amount of debt owed on specific accounts. Credit scores are affected by the number of accounts you have with balances. In addition, the proportion of credit limits utilized will affect the credit score as well. For example, when someone is approaching their credit limit on a card, this may indicated that they are overextended and more likely to make late or missed payments.

Length of Credit History (15%)

As the category suggests, the length of time your credit account has been open influences your credit score. Having numerous recently opened accounts will negatively impact your score. In addition, the length of time from your last activity on an account may also lower your score.

Types of Credit in Use (10%)

Credit scores are effected by total number of open accounts you have and the overall makeup of that mix of credit. It is not necessary to have each type of credit account considered to establish good credit. However, it is also important not to open a lot of accounts you do not intend to use.

New Credit (10%)

The number of recently opened accounts will effect the credit score. Opening multiple credit cards in a short period of time may negatively effect your score. In addition, running up high balances on recently opened cards will also have a negative impact.

Credit inquires also fall into the New Credit category when determining the credit score. Checking your credit report will not effect your credit score as long as the report is obtained directly from the credit reporting agency. Reports from all three may be obtained for free from www.annualcreditreport.com. Multiple credit inquires from creditors may negatively impact your score. However, numerous inquires in a short period of time, such as when shopping for a car, are typically treated as a single inquiry and will have little impact on the overall credit score.

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