Your Credit Score Card
The most commonly used method of evaluating a consumer’s credit history is to use a popular method developed by the Fair Isaac Credit Organization (FICO). This credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan.
What does the FICO Score consist of?
The score is based on data available regarding the borrower’s income, assets, or bank account. FICO produces a numerical score by examining such fiscal determinants as:
- Credit History
- Income levels
- Outstanding debt
- Debt utilization
- Access to credit
Fair Isaac Credit Bureau scores range from approximately 375 to 900 points and are available through the three national credit data repositories (Equifax, Trans Union and Experian). All of these three models are often referred to as “FICO” scores.
Your FICO Score Calculation
The total credit score is taken from several aspects of your credit report. The four main segments are shown approximated percentages as follows:
- 35% Your Payment History
- 30% Amounts You Owe
- 15% Length of Your Credit History
- 10% Types of Credit Used
- 10% New Credit
Your Payment History
- The number of accounts paid as agreed
- Any negative public records or collections
- Delinquent accounts (total number of past due accounts, how long they have been past due and how long it been since the last past due payment.)
What You Owe
- How much is owed on accounts and the type of accounts with balances
- Amount of revolving credit lines used (looking to see if borrower is over-extended)
- Amount owed on installment loan accounts vs. their original balanced (looking for consistancy of paying down the debt)
- How many zero down balance accounts
Credit History Length
- Total time period credit report has been tracked
- Length of time accounts have been open
- How much time has passed since the last activity
- The longer the credit history (good), the better the score
Types of Credit
- Types and total number of accounts (installments, revolving, mortgage, etc.)
- The mix of account types typically generates better scores as opposed to having numberous revolving credit accounts
- How many accounts that have been opened recently and the percentage of new accounts to total accounts
- Number of recent credit inquiries
- The amount of time that has passed since recent inquries or newly-opened accounts
- Has credit history been recently re-established after encountering problems in making payments
- Just checking in general to make sure there’s not an attempt to open numerous new accounts
Improving or Maintaining Your Credit Score
The single most important element of maintaining or improving your credit score is to pay your bills on time. Even if you hardly owe very much, it’s important to make your payments in a timely manner. Outstanding debt should be minimized, avoid over-extending debt and applying for credit needlessly.
To improve your credit score you must rebuild your credit history. The length of time to rebuild your credit history after a negative change depends on the reason behind the change. Typically a negative report is due to a collection or delinquency in the account. These elements will continue to affect your scores until they reach a certain age. As time passes certain items are no longer reported on your credit, seven years for a delinquency, ten years for bankruptcy and fifteen years for tax liens. An inquiry will remain on the report for two years.
Rebuilding Damaged Credit
- Start Small – Open an account with a local department store and pay it off each month.
- Use a “Secured Credit Card” – You make a deposit with the credit card company and they give you a credit card to use. It’s very much like “reverse credit”. Be sure the credit card company reports history to one of the major reporting bureaus so you are building a good credit history.
- Moderation is the Key – Keep a small balance and pay more than the minimum balance each month.
- Keep your balances low – Avoid having a balance that is more than 30% of the credit limit.