Credit Scores

What credit scores are, and how they are calculated.

Credit bureaus use a credit scoring system, commonly known as the FICO score, developed by Fair, Isaac & Co., assigning each person's credit report a number that ranges from 400 to 850 points.

The invention of credit scores enabled companies to electronically reach credit decisions without having to assign a loan officer to review the credit report.

All three credit bureaus use the same FICO formula to compute credit scores, but they give different names to it. Equifax calls it the Beacon score. Experian calls it the Experian/Fair Isaac Risk Model. Trans Union calls it the Empirica score.

• A score of 420 means you can't get a credit card, car loan or mortgage.
• A score of 570 means you can get a credit card, car loan or mortgage, but you can't get a good rate, and that you may have to pay some extra fees.
• A score of 720 means you will most probably get the best available.

How is your Credit Score Calculated?

Various facts have varying weights on your credit score:

• The types of credit accounts (10%).
• The number of recently opened accounts, and their proportion your overall credit (10%).
• Payment history, past adverse information. (35%).
• The amounts you owe (30%).
• The length of your credit history (15%).
• The percentages above apply to most people. However, Fair, Isaac & Co. also state that for particular groups, such as those who have not been using credit for long, are subject to different percentages. Other scoring systems can also apply different percentages on the same information.

Fair, Isaac & Co. explains each of the above as follows:

Payment History: Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.), Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items), Severity of delinquency (how long past due), Amount past due on delinquent accounts or collection items, Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any), Number of past due items on file, Number of accounts paid as agreed.

Amounts Owed: Amount owing on accounts, Amount owing on specific types of accounts, Lack of a specific type of balance, in some cases, Number of accounts with balances, Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts), Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

Length of Credit History: Time since accounts opened, Time since accounts opened, by specific type of account, Time since account activity.

New Credit: Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account, Number of recent credit inquiries, Time since recent account opening(s), by type of account, Time since credit inquiry(s), Re-establishment of positive credit history following past payment problems.

Types of Credit Used: Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).

Other important things to remember, according to Fair, Isaac & Co. are:

A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.

The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.

Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

What is the Credit Score Distribution in the Population?

Below is the FICO score ranges by population percentage:

Some Facts About Credit Scores

• Married people have similar credit scores. After several years of marriage, their credit scores are usually within 50 point distance from each other.
• According to Fair, Isaac & Co., fewer than 4 in 10 customers have ever been reported as 30 or more days late on a payment. Only 2 in 10 have ever been 60 or more days overdue on a credit obligation. Fewer than 1 in 10 have had a credit account closed by the lender.