In the beginning: Fair, Isaac and Co.(FICO), a San Rafael, California company was founded in 1956 by Bill Fair and Earl Isaac. They invented the practice of credit scoring for creditors. Each credit agency, and most lenders, calculates credit scores using computer programs from FICO or their own software based on the FICO rating system.
Why a credit score? Credit scoring is used to present a shorthand of the risk you currently represent to a lender. Many things in your credit file, such as how many open accounts you have, how long have you had a credit history, your mortgages, loans, any public records, and others items are used to calculat a three-digit score ranging from 300 and to a maximum of 850. Many times a lender will combine other factors with your credit score to decide on whether to give credit or not. Your credit score places you into one of basically three categories: Prime, sub-prime, and shafted.
Prime category: You are considered a "prime borrower" if you have a credit score above 680 and you won't have any problems getting good interest rates on your credit cards, car loans, or home loan.
Sub-prime category: You become a "sub prime" borrower if your score falls below 680. In this category you will pay higher interest rates for your credit.
Shafted: Below 560 is the shafted score. You may still get a credit card but you will likely be hit with a security deposit or high acquisition fees. Also, your interest rate will likely be between 15 and 23%. At this score, you can forget about most home loans and the majority of new car loans. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates and it may prevent you from getting a job with many companies.
How do your scores get calculated? Each credit agency may calculate your FICO score by different methods. Your score from a credit agency does not come directly from FICO. Each agency has its own twists and name. "Beacon" is used by Equifax, "Empirica" is used by Trans-Union, and "Experian/Fair Isaac" is used by Experian. Instead of FICO scores these scores may be referred to as "Bureau Scores."
Since bureau data determines your score, every time your report changes your score will change. Many categories of information are taken into account in the calculation of your score. It is not based upon a single piece of information or factor. The importance of one or more factors may change in your FICO score as the information in your credit report changes. Creditors look at many things when deciding on credit approval. These include the kind of credit you are applying for and your income. Your FICO score only evaluates the information retained by the credit reporting agency and does not reflect these other items.
What are the factors that affect your credit score? Five main factors are used in calculating your overall credit score.
1.) Previous credit performance (payment history) 35%. A lender wants to know what your payment history is like. Your payment history is just one piece of information used in calculating your score, although it can be very important.
2.) How much debt do you already have? (amount owed) 30%. Can the borrower afford to pay their existing bills and still pay this new credit? Most lenders want to know the answers to these types of questions and these answers are almost as important as your previous credit history.
3.) How long have you had your existing credit? (age of credit) 15%. The longer credit history the better score in general. This does not mean that people with short histories, young people, or students can't still have a high overall score as long as the other factors are good as this factor makes up only 15% of the total score. With no credit history you need to open an account, pay on it, and wait in order to improve this part of your score.
4.) Recent credit applications 10%. Shopping for credit and finding the best terms to meet your needs is important. However, every time a creditor runs a credit check on you, an inquiry is generated on your reports. FICO calculations take credit shopping into account. Specifically, a group of inquiries which probably represent a search for the best rate on a single loan are treated as a single inquiry (auto or mortgage loan inquiries only). Inquiries that were within 30 days of each other on an Auto loan count as one inquiry. You should avoid unnecessary inquiries as they may hurt your score. Although the system takes into account rate shopping, things like applying for credit card offers will add inquiries to your file and may reduce your score.
5.) The credit type mix 10%. FICO likes a variety of different types of credit including installment loans and revolving loans. Good examples of Installment loans are Mortgages, auto loans, and personal loans which allow you to repay the loan over a specific period of time with fixed monthly payments. Revolving credit remains fully open as long as the limit has not been reached and it allows you to repay without specific fixed payments (home equity lines of credit, credit cards, and retail store accounts). A more detailed review of Credit Scores is available for FREE.
Why a credit score? Credit scoring is used to present a shorthand of the risk you currently represent to a lender. Many things in your credit file, such as how many open accounts you have, how long have you had a credit history, your mortgages, loans, any public records, and others items are used to calculat a three-digit score ranging from 300 and to a maximum of 850. Many times a lender will combine other factors with your credit score to decide on whether to give credit or not. Your credit score places you into one of basically three categories: Prime, sub-prime, and shafted.
Prime category: You are considered a "prime borrower" if you have a credit score above 680 and you won't have any problems getting good interest rates on your credit cards, car loans, or home loan.
Sub-prime category: You become a "sub prime" borrower if your score falls below 680. In this category you will pay higher interest rates for your credit.
Shafted: Below 560 is the shafted score. You may still get a credit card but you will likely be hit with a security deposit or high acquisition fees. Also, your interest rate will likely be between 15 and 23%. At this score, you can forget about most home loans and the majority of new car loans. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates and it may prevent you from getting a job with many companies.
How do your scores get calculated? Each credit agency may calculate your FICO score by different methods. Your score from a credit agency does not come directly from FICO. Each agency has its own twists and name. "Beacon" is used by Equifax, "Empirica" is used by Trans-Union, and "Experian/Fair Isaac" is used by Experian. Instead of FICO scores these scores may be referred to as "Bureau Scores."
Since bureau data determines your score, every time your report changes your score will change. Many categories of information are taken into account in the calculation of your score. It is not based upon a single piece of information or factor. The importance of one or more factors may change in your FICO score as the information in your credit report changes. Creditors look at many things when deciding on credit approval. These include the kind of credit you are applying for and your income. Your FICO score only evaluates the information retained by the credit reporting agency and does not reflect these other items.
What are the factors that affect your credit score? Five main factors are used in calculating your overall credit score.
1.) Previous credit performance (payment history) 35%. A lender wants to know what your payment history is like. Your payment history is just one piece of information used in calculating your score, although it can be very important.
2.) How much debt do you already have? (amount owed) 30%. Can the borrower afford to pay their existing bills and still pay this new credit? Most lenders want to know the answers to these types of questions and these answers are almost as important as your previous credit history.
3.) How long have you had your existing credit? (age of credit) 15%. The longer credit history the better score in general. This does not mean that people with short histories, young people, or students can't still have a high overall score as long as the other factors are good as this factor makes up only 15% of the total score. With no credit history you need to open an account, pay on it, and wait in order to improve this part of your score.
4.) Recent credit applications 10%. Shopping for credit and finding the best terms to meet your needs is important. However, every time a creditor runs a credit check on you, an inquiry is generated on your reports. FICO calculations take credit shopping into account. Specifically, a group of inquiries which probably represent a search for the best rate on a single loan are treated as a single inquiry (auto or mortgage loan inquiries only). Inquiries that were within 30 days of each other on an Auto loan count as one inquiry. You should avoid unnecessary inquiries as they may hurt your score. Although the system takes into account rate shopping, things like applying for credit card offers will add inquiries to your file and may reduce your score.
5.) The credit type mix 10%. FICO likes a variety of different types of credit including installment loans and revolving loans. Good examples of Installment loans are Mortgages, auto loans, and personal loans which allow you to repay the loan over a specific period of time with fixed monthly payments. Revolving credit remains fully open as long as the limit has not been reached and it allows you to repay without specific fixed payments (home equity lines of credit, credit cards, and retail store accounts). A more detailed review of Credit Scores is available for FREE.
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To get a Complete Free credit score guide visit Free Credit Score Guide; For financial help from expert Bob Hill visit financial help You can get a unique content version of this article from the Uber Article Directory.
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