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April 2007
Index of all
past
Affiliate Corner columns
Know how credit bureaus rate your history
By Ben Yost,
Great Southwest Mortgage
By now, you should understand that there are three main credit bureaus - Transunion, Experian, and Equifax - and that they give you a grade on your credit-worthiness according to what your creditors report to them.
While each of these three bureaus may have some small variables that differentiate their scoring, the FICO scoring model is still the heart. FICO stands for Fair, Isaac and Company, the group that designed the model. Here is how they say the score breaks down:
• 35 percent - payment history
• 30 percent - amount of debt
• 15 percent - length of credit history
• 10 percent - types of credit
• 10 percent - new credit
Payment history
Payment history is the single most important part of a credit score. According to the credit agencies, “payment history” includes: account payment information on specific types of accounts (credit cards, retail accounts, installment loans, mortgages, etc.) and the presence of adverse public and collection items.
Delinquencies aren’t reported to the credit bureaus until after they are 30 days late. What’s valuable to know is that delinquencies which occurred within the past two years are of greater weight than older items.
Current debt
The amount owed on current debts, loans, and credit cards is the second most heavily-weighted part of the FICO credit model.
According to the credit agencies, the “amount owed” includes the number of accounts with outstanding balances on them. If you have a $30,000 credit limit and you are “maxed out” with fully that much debt, it can have a negative impact on your credit score. If you have no balance, however, the FICO model says you know how to manage credit, and your score goes up.
Length of history
The length of credit history is worth 15 percent of your overall credit score.
According to the credit agencies, “length of credit history” means the time since the accounts were opened and the amount of time since your last account activity. The longer your credit history, the better!
Variety of credit
Credit bureaus like to see a variety of types of credit - worth 10 percent of your credit score.
To optimize your credit scores, there should be a mortgage, an auto loan and three credit card lines of credit.
New credit
Inquiries can amount to 10 percent of your credit score, but can have a surprisingly large impact.
According to the credit agencies, inquiries or “new credit” includes the number of recently opened accounts and number of recent credit inquiries. Credit inquiries “ding” your score.
According to myFICO.com:
“Most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.” (Note that this does not include credit inquiries from credit cards - these will always affect your score).
The bottom line is to pay your bills on time and keep your balances as low as possible and your credit scores will always be high as they can be!
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