Your FICO(tm) score is your most important number when it comes to using debt and credit to create wealth. What's yours? Let us show you how to get and maintain the highest credit score possible; and what to avoid if you're trying to raise your score.
How are Credit Scores Calculated:
A question we are often asked is "How are credit scores calculated?". The methods of calculating your FICO credit score may differ slightly depending on
the credit bureau. When obtaining your score from one of the Credit
Bureaus it is important to understand that your score does not come
directly from FICO. It is adapted to each bureau and is given its own
name: Equifax uses "Beacon", Trans Union uses "Empirica", and Experian
uses "Experian/FICO." These scores are also referred to as your
"Bureau Scores."
Since your score is derived from your bureau data (your "credit report"), it will
change every time your report at each bureau changes. However your score is
calculated, it will always take into consideration many categories of
information. No one piece of information or factor determines your
total score. As the information in your credit report changes, the importance
of one or several factors may change in your FICO score. Lenders look
at many things when making a credit decision, including your income and
the kind of credit you are applying for. However, your FICO score does
not reflect these facts as it only evaluates the information retained
by the credit reporting agency.
What factors affect your credit score?
There are five factors used in credit scoring calculations that determine your overall credit score.
A lender wants
to know what your payment history is like. Have you paid everything on
time, are you late on anything now, and so on. Your payment history is
just one piece of information used in calculating your score, although
it can be the very important.
2. Current Level of Indebtedness (Amount Owed) 30% of Score Calculation
How much is too
much? Can the borrower pay me and still afford to pay his other bills?
Not necessarily. Having available credit can actually help your ratio
of debt to available credit. These are the types of questions that most
borrowers want to know and the answers are almost as important as your
previous credit history.
3. Amount of Time Credit Has Been In Use(Length of Credit) 15%
of Score Calculation
Generally speaking, the longer the credit history the better your
score. However, this factor only makes up 15% of your total score so
even young people, students or others with short histories can still
score high overall as long as the other factors show good. If you are
new to credit there is little you can do to improve this part of
your score. Open an account and be patient.
4. Pursuit of New Credit (Credit Inquiries) 10% of Score Calculation
Credit is much more popular today.
Just look at the number of credit card offers you get via the Internet
and in the mail. Consumers can now shop for credit and find the best
terms to meet their needs. Each time someone runs a credit check on
you, it creates an inquiry.
Fair Isaac has changed some of its calculations to account for
these new trends. Specifically, they treat a group of inquiries - which
probably represents a search for the best rate on a single loan - as
though it was a single inquiry. (note: This only applies to auto or
mortgage loan inquiries.) For example, auto loan inquires that are
within 14 days of each other only count as one inquiry.
5. Types of Credit Experience (Credit Mix) 10% of Score Calculation
It's good to have a healthy mix of different
types of credit: installment loans; retail accounts; credit cards; and
your mortgage. This part of the score is not normally a key factor in determining your
score but it can help a close score. It's not a good idea to try and
open different types of accounts in an attempt to try and make this factor
better. It will likely reduce your score in other areas. You should
never open accounts you don't intend to use anyway.
What type of accounts you have, and how many, can make a big
difference. The optimal ratio of installment versus revolving accounts
depends on your profile and differs from person to person. One factor
that seems to have significant influence is your percent of open
installment loans. Too many can lower this portion of your score.