Credit Score
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Credit Score

You probably have several credit scores ...

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Reading and interpreting credit reports can be time-consuming. In fact, most lenders have decided that they don’t want to do all that work! They want to know about your credit, but they don’t want to train employees to evaluate your credit. These days, most companies use a shortcut. They rely heavily on the credit bureaus, which put all of your credit report entries into a complicated math formula that spits out a number. This number is your credit score.

You probably have several credit scores, but the one that most companies depend upon is your FICO score. A FICO score is determined by software developed by a company called Fair Isaac and Company (FICO). You have one FICO score at each of the major credit bureaus, so you have three major FICO scores.

It would be too easy if each of the credit bureaus simply called their credit score for you a FICO score. Even though they use very similar calculations and each system was also developed by Fair Isaac and Company, each credit bureau has its own name for your FICO score:

  • Equifax calls their FICO score BEACON
  • Experian calls their FICO score Experian or Fair Isaac Risk Model
  • TransUnion calls their FICO score Empirica

To get a FICO score, you have to have at least one open line of credit in the last six months. In addition to that, at least one company has to make a report to the credit bureau about you in the last six months. As you open and close lines of credit, your score changes. Any reports to the credit bureaus also change your credit scores.

FICO scores can range anywhere from 300 to about 850. The higher your FICO score, the more likely you are to get credit or a better (lower) interest rate.

The actual calculations used in the software are complex. Fair Isaac has revealed a basic outline of how the score is calculated:

  • 35% of your score comes from whether or not you pay your bills on time
  • 30% comes from how much credit you are using vs. how much credit you can use (your credit card charges vs. your credit card limits)
  • 15% comes from how long you’ve had a credit history
  • 10% is based on what type of credit you use (credit cards vs. loans, etc.)
  • 10% is from how much credit is recent or outdated

From these percentages, it follows that paying your bills on time and not maxing out all of your credit cards will improve your FICO score. These have always been major factors in credit history, so it’s not surprising that they make up the majority of your score.

Because of certain equality laws, a lender can’t deny you credit solely on your credit score. There are, therefore, usually other factors that determine your ability to attain credit and better interest rates, but credit scores are becoming more and more important.

From: Understanding credit and credit cards (don)
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