UNDERSTANDING YOUR CREDIT
What’s In Your Score
A credit score is an objective measure of credit risk. It summarizes the information from your credit history into a single number. Your credit score is a measure of the likelihood that you will pay your debt as agreed. This forms a basis for comparing borrowers. Borrowers with higher credit scores are more likely to pay their debts on time and as agreed. The lower your credit score, the more likely you are to default on your debt.
FICO scores range from 300 to 850, with 850 being the best possible FICO score. Some credit reporting agencies are experimenting with a boarder range of scores.
Generally, the FICO score depends on the following factors.
These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit long – the importance of these categories may be somewhat different.
- 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, judgments, 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 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
- 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 balanced to total credit limits on certain types of revolving accounts)
- Proportion of installment loan amounts still owing (proportion of balanced 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
- 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.)
Please note that:
- A score takes into consideration all these categories of information, not just one or two.
No one piece of information of 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 then 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.
Improving Your Credit Score
There are no quick fixes to improving your credit score. Disputing all of the negative information your credit report will not improve your score. If there is inaccurate information, you should certainly dispute it so that it can be corrected. But otherwise, don’t dispute information in the report in discriminatively. Negative but accurate information will not be removed.
It is very easy to ruin a credit score, but it takes a long time to improve a bad credit score.
Here are a few good tips for improving your credit score:
- Pay your bills on time and continue paying your bills on time. The number of accounts that are currently and the length of time for which they are paid on time has a big impact on your credit score.
- Paying off an account with negative information does not remove that information from your credit history. Only time can reduce the impact of the negative information, as older credit history doesn’t count as much as more recent information. It is better to keep the account active, but to make regular payments pas per the credit agreement. This provides positive information to help compensate for the negative information.
- Do not close accounts that are current, even it you are no longer using them. The length of your credit history in an account has a positive impact, as does the number of accounts that show no late payments. It is more important to have accounts with positive history then to have no history because you have no accounts.
- Minimize your use of revolving credit, such as credit cards and department store cards. Keep the balance low, and preferably pay off the balance in full at the end of the month. Installment loans (auto loans and mortgages) are a better form of debt.