ALDREENA M. FEREBEE asked:


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By Aldreena M. Ferebee

What is a FICO Score?

A credit or FICO score is a numeric representation of a person’s credit profile and it is the name for the most well known credit scoring system. The acronym FICO stands for Fair Isaac Company, a California firm founded in 1956 by Bill Fair and Earl Isaac.

History

The FICO score has been around for many years, then in 1995, the mortgage and lending business started using them for the primary purpose of keeping down the expenses associated with Home Equity loans. These scores are now used by Freddie Mac and Fannie Mae in conjunction with their automated underwriting systems. In 1996 the Federal Government insisted on using a credit score on all credit reports. The scores are based on years of computer modeling aimed at predicting who might be a credit risk. There has never been a published model of how the score is derived. The secrecy of the FICO model reduces the likelihood of manipulation. The FICO score is used by all three credit bureaus (Experian, Trans Union, and Equifax). The credit bureau’s computers evaluates a complete credit profile and assigns a score that is used to estimate credit worthiness.

Purpose

Each bureau uses its own scoring system; each person being evaluated in the system will have 3 separate scores. When a person applies for credit and receives a high score, they are viewed as a better credit risk to lend money to than a person with a lower score. This rating system consist of several factors from your credit file that includes length of credit history, number of open accounts, loans, mortgages, and public records. The factors used are formulated to produce a 3-digit score between 300 and 950. If a person’s credit score is above 680, they are considered a “prime” or low risk in terms of the lender who wants to lend money, or the landlord who wanted to rent or lease to you. If your score is below 680, you are “sub-prime” and fall in the middle category in terms of risk of renting and leasing. It doesn’t mean you shouldn’t get a rental/lease, but you may be required to go a step further and provide a security deposit for the first and last month rent payment before a person moves in. Anything score below a 560 is considered a “shafted’ score and this person is not considered a good credit risk.

Elements of the FICO Score

The FICO model has 5 main elements:

1) Past payment history (about 35% of score) the fewer the late payments the better. Recent late payments will have a much greater impact than a very old Bankruptcy with perfect credit since.

2) Credit use (about 30% of score) Too many credit cards can bring down the score, however, closing these accounts can sometimes do more harm than good if the entire profile is not considered.

3) Length of credit history (15% of score) the longer the account has been open the better the score. Opening new accounts and closing seasoned accounts can bring down a score a great deal.

4) Types of credit used (10% of score) whenever a person uses a finance company account, it may lower the score. Bank or department store accounts are better accounts to be open.

5) Inquiries are (10% of score) multiple inquiries can be a risk if several cards are applied for or other accounts are close to maxed out. Multiple mortgage or car inquiries within a 14 day period are counted as one inquiry.

Other factors that affect your FICO score are:

Number of outstanding balances

Balances owed vs. credit available or high credit

Number of balances opened in the last 6 months

Too many revolving accounts

Too few revolving accounts

Excessive credit inquiries

Delinquencies

Too many accounts opened within the last twelve months

Short credit history

Number of 30, 60, and 90 day late payments

Public records that include; judgments, tax liens or bankruptcies

Length of credit history

Recency of any slow pay history

Balances on revolving credit are near the maximum limits

No recent credit card balances

Repairing your FICO Score

Now that you understand how the FICO credit score works lets look at how to improve your credit score. As you read above the credit bureaus use various components in order to get your credit score, this means that you will have to review these same components of your credit report in order to fix it.

- The first thing you must do to improve your credit score is fix the payment history category. Pay your bills on time, if you pay on time, creditors will not submit a past due report to your credit report. If you can’t pay on time, notify your lender that you need to work something out. Get current on past due accounts

- Keep low balances on your credit cards, stay well below your credit limit – 35% or lower is best. Don’t open new accounts just to lower your used credit ability – having too much credit is a risk too old accounts open if you’ve been a good borrower.

- If you have no credit start building your credit as soon as possible and when shopping for new credit, keep it all within a short time frame no more than 14 days or less. If a borrower has a bad history, they can improve their credit scores by opening a new account and managing it sensibly.

- Having installment debt (where you pay fixed monthly installments to eliminate the debt) is “better” than revolving debt or (open-ended credit card debt). Certain finance company debts (like buying a product with retailer financing) can lower your score. In long run, it will take time and discipline to improve credit scores.

In conclusion, your credit score can only be changed by the way that item is reported directly to the credit bureaus (Experian, TU, and Equifax). Fixing those negative factors in your credit report will raise your score. It is best to make these corrections before you try to purchase a home, because you can never be sure the exact impact a change will have on your score. When all negative factors are fixed, written confirmation from the creditor will be required to show the lender that your credit report is updated and all negative factors fixed and the way to do it follow this formula.

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Jim Kemish asked:


Not all Scores are Equal

There are many credit scores available, but the only one that matters is your FICO score. FICO, by the way, is an acronym for Fair Isaac and Company, the developer of the score. This is the score that virtually all lenders use. Other scores attempt to approximate the FICO score, but frequently vary by a significant margin.

One Score with Three Names

The FICO score may be referred to by three different names. This is because the three bureaus have branded it for their own marketing. Equifax calls it a BEACON score, TransUnion calls it an EMPIRICA score, and Experian calls it the EXPERIAN/Fair Isaac Risk Model. Because of this you will hear of three different scores, although they are all a product of the same formula.

Why Are Your Three Scores Different?

Your three scores are different because each bureau gathers information from a slightly different mix of creditors. If you were to look carefully at your three reports you will notice that some accounts are missing on each bureau. Timing also plays a roll. A recent change in your credit may be picked up sooner at one bureau than another.

What is Included in Your Score?

Are you working on credit repair? Be proactive. But in order to influence your score it is essential to understand how it works. Here is an overview of the contributing factors.

Pay History

Your pay history is the big ingredient. This category includes installment and revolving accounts, as well as public records and collections. The age of a derogatory item diminishes its impact on your score. The first step in the credit repair process is to examine your report for obvious errors in this category which makes up 35% of your score.

Balances

Your account balances make up the next category. The relationship between the balance and the credit limit on your revolving accounts is a major factor. Anyone involved in a credit repair effort should minimize their revolving balances as much as possible. The relationship between the current balance and the original balance on installment loans is also taken into consideration. This category makes up 30% of your score.

The Age of Accounts

New credit will have a negative impact on your score, and those accounts that you have kept alive and healthy for years have a good impact. Closing old accounts is a common credit repair error to be avoided. This category makes up 15% of your score.

New Credit & Inquiries

New credit and recent inquiries are a factor. Many credit repair candidates open new secured credit cards for the long term benefit. But generally, anyone involved in credit repair should limit new credit activity. Either way you will lose a few points on this one. Fair Isaac weighs this at 10% of your score.

Type of Credit

The type of your credit is the final 10% of the calculation. Fair Isaac won’t define the perfect mix of mortgage, installment, revolving, and consumer debt, but in our experience the key to a long term successful credit repair effort is to be a moderate user of credit, make your payments on time, and try to keep those revolving balances down.

False Credit

As you begin your credit repair effort it is important to have reliable information. Amazingly, the same three credit bureaus that sell authentic FICO scores to lenders also sell unreliable estimated scores to consumers. Every day untold numbers of consumers go to TransUnion’s “True Credit” website and pay for what they believe to be their credit scores. What they get are deceptively named “TrueCredit” scores which vary significantly from the FICO scores used by lenders. Here is the (almost impossible to find) small print from the TransUnion website. “TrueCredit is not connected in any way with Fair, Isaac and Company; the credit score provided here is not a so-called FICO score. The credit scores of TransUnion may not be identical in every respect to any consumer credit scores produced by any other company.”

Real Credit Scores

Are you starting the process of credit repair? Do you want to see your real FICO scores? MyFico.com is the only place that consumers can purchase their authentic FICO scores. Want to save some money? It is handy to know that mortgage brokers typically look at all three FICO scores when pre-qualifying you for a mortgage. If you ask, they just might give you a copy of your report along with all three scores. It can’t hurt to save a few dollars!

Copyright © 2007 James W. Kemish. All Content. All Rights Reserved.

Michael Rasco asked:


A person’s credit score, often referred to as their “FICO” score, is an important tool that lenders use to help determine the creditworthiness of a potential borrower. If you want to make a large purchase, such as a house, for which you will need financing, you want your score to be as high as possible. To understand how to improve your overall credit rating, it is imperative you understand what factors influence your FICO score.

Payment History

Do you pay your bills on time? Most creditors, lenders, and service providers will charge a fee if you do not. Obviously, the biggest thing wrong with that is the egregious waste of money. What is worse in the long term is that after 30 days of nonpayment, the lender will likely report you to one of the major credit bureaus. (In the U.S., there are three such credit bureaus: Experian, Equifax, and TransUnion.) Considering that thirty-five percent of your credit score is based on payment history, it becomes clear how important it is to keep up with your financial obligations. No other single factor has that much influence on your FICO score.

Debt to Total Credit

The ratio of your outstanding debt to the total of your credit lines and loan amounts counts for thirty percent of your credit score. For example, if you have a credit card with a limit of $5000, and you owe $4000, your debt to total credit ratio is eighty percent. After paying down $3000 of the principle, your outstanding balance is $1000, giving you a ratio of twenty percent, which is much better.

If your outstanding balance occupies seventy percent or more of your total credit line, it is viewed negatively by the credit bureaus. If the ratio is in the range of thirty to seventy percent, it is doing little or no harm to your credit score; however, it certainly is not helping your credit score. Bring your debt to less than thirty percent of your total available credit, and your FICO score will very likely improve. Getting balances and, therefore, debt to credit ratios down to zero is clearly a desirable goal. It is important to remember, though, that unused credit will not help your credit score. We will explore that topic a bit later.

Length of Credit History

Fifteen percent of your FICO score is based on how long you have had some type of credit. The perception is that someone who has owned a credit card for twenty years is more likely to be responsible and credit worthy than a young person right out of high school who has the same credit card. Although this is true generally, it is certainly not always the case; that is why it is weighted significantly less than payment history and the debt to credit ratio.

New Credit

If you have one credit card for ten years, and then you apply for and receive three more credit cards, expect your credit score to come down a bit. A long-established credit account is considered more stable than a new account. Of course, how your credit score reacts to new credit is also affected by other factors. A new card will increase your total credit line, thereby reducing your debt to credit ratio. An old credit account with a poor payment history is worse than a new account in good standing. All things being equal, new credit is not bad, but old credit is very good. New credit accounts for ten percent of your FICO score.

Unused credit is considered very much like new credit. If you can use a credit card every month, and pay off the balance in full every month, you will see your credit score increase steadily. This is difficult for many people, because of the temptation to overuse the credit card. Responsibility and restraint are critical when using this technique. Remember that, even though unused credit is not very good, it is not at all bad; overused credit is.

Types of Credit Used

The remaining ten percent of your credit score is based on what type of credit you have used. A retail store credit card is not very good. Too many of them could be bad for your credit score, in fact. Small loans, if paid off in a timely manner, have a positive effect. Major credit cards are even better. Big ticket items like auto loans and home mortgages are very good, once again if you make the payments on time.

These five areas are the basis for your FICO score. Armed with this knowledge, you are better equipped to make the changes necessary to improve your credit score. An overwhelming majority of lenders will use your FICO score when considering your application. Put yourself in position to get the best possible deal. Read this article again, and then get started!

Cornie Herring asked:


Have you ever wonder why your online application for credit can be approved in 60 seconds? Or get pre-qualified auto loan for a car without asking you how much is your income? Or why your interest rates on loans are different from the interest rates of your friends or neighbors?

Your credit scoring is the factor that affect all the above. It is your responsibility to main a good credit score. You will need to use it to get you a best available rate when come to apply for credit.

What is Credit Score?

Most of time credit score is refer as FICO score (Fair Isaac Corporation), it is a number based on the information in your credit file that shows how likely you are to pay a loan back on time, the higher your score, the less risky you are. You credit score is derived from three major credit bureaus: Exprian, Equifax and TransUnion. These 3 major credit bureaus will compile your credit report based on the information provided by the companies that gave your credit in the past. Based on the information such as your payment history, the length of your credit history and the type of credit your have and the amounts owed, the credit bureaus will generate your credit report. And based on your credit report, a number or scores will be assigned to you; this number will be range from 300 to 850. This magic number is your credit score, the higher the number the better you are.

When Your Credit Score Count?

Your credit score will play an important part when comes to applying loans or other credits, it may save you a significant of interest if you are have good credit score. When you apply for mortgage, car loan, business loan or credit card, the lender or credit company will assess how risky you are as a potential borrower, the higher your score, the less risk you pose to the lender and the more likely you will get a better interest rate for application.

You will be offered at a relatively low rate if your credit score is above 700 and if your credit score is above 760, you will get the best available rates because you are the lowest risk borrower at this high of credit score. You loan will be approved with high loan rates if your credit score is below 600, and if your credit score is really bad, you may be not be able to borrow at all.

Maintain High Credit Score

Now you know how important your credit score is and when it becomes important and you can use it as a tool to save cash. Hence, it is important for you to maintain your credit score at high level. Things that you can do to increase your credit score include:



Pay your bills on time

Keep balances low on credit cards

Don’t open a number of new credit cards that you don’t need

Have credit cards - but manage them responsibly



In Summary

Credit score is not just a number, it is a tool that you can control and use to save cash. It will become important whenever you need credits and it is an important factor to be considered by any financial organization before they approve your credit application. Hence, keep your credit score all time high.

William Brooks asked:


You are shocked when your loan is denied, or maybe you were approved, but the interest rate is much higher than you anticipated. How can that be you say? My credit score is good, I know I checked. Maybe it’s not as good as you think. It all depends on there you got it and what kind of credit score it is.

The fact is there are several different credit scoring methods. Credit scores calculated from the same credit reports can differ substantially from credit scoring method to credit scoring method. So how can you ever know what your credit score really is? Well, luckily, 75% percent of lenders use FICO scores exclusively and you can purchase FICO scores yourself–you just have to know where to go. (www.myfico.com)

FICO credit scoring is a numeric method of scoring your credit worthiness developed by Fair Isaac and Company. Your credit score is a number between 300 and 850 that tells creditors how likely you are to pay your bills. The higher the number, the better it looks to potential lenders and creditors.

The three major credit bureaus each have their own version of the FICO score: Equifax uses the Beacon system, TransUnion uses the Empirica system, and Experian uses the Experian/Fair Isaac system. Despite each credit bureaus’ use of their own versions, all systems are based the original Fair Isaac FICO scoring method, so each credit score calculated with these systems are generally called FICO scores. However, although most lenders do use FICO scoring, some lenders may have their own scoring methods.

There is only one place where you can get your FICO score from all three bureaus and that is at www.myfico.com. If you order your credit score from anywhere else, again be aware that these scores are “FAKOs” (or “fake”) and can differ considerably from your FICO credit scores.

Adding to the confusion is the credit bureaus themselves. Recently, Experian revealed that the national average credit score of its consumers is 678. This is very misleading to the average consumer. When you buy your credit report and score directly from Experians website, you are getting what they call the “PLUS Score,” which is NOT a FICO score, and is NOT used by lenders anywhere. (Equifax is the exception–you can buy your FICO score directly from them at their website; however, the only place to get all three scores together is at www.myfico.com.) The 678 PLUS Score reported by Experian is actually the average of consumers’ PLUS Scores, not their FICO Scores.

Clearly, the PLUS Score (and all Non-FICO scores) are useless. Not only that, but such hype misleads consumers into purchasing their PLUS Score thinking that they are getting the same credit score that their lender will use. Non-FICO scores are worthless not matter what the credit bureaus or any website selling non-FICO scores claim. Even a few points difference in your credit score can mean confronting the reality of the loss of thousands of dollars out of youSr pocket–a loss that you probably didn’t plan for. The next time you want the most accurate credit score available, do yourself a favor and get the industry standard: the FICO credit score.