Your credit score (most often referred to as your FICO score) is a number derived from your credit report that will typically range from 350 - 850. (Although other scoring models will range from 300 - 990). The higher your credit score, the better your credit rating, and the lower the perceived risk you are to a lender.
It’s important to note that any other “Credit Score”, such as a Vantage score, (created by both TransUnion and Experian), a Trans Risk score (TransUnion), a Plus Score (Experian), or a Credit Expert (produced by Equifax), or any other “credit score” has absolutely no value to a lender. These “credit scores” are very misleading in relationship to your actual credit worthiness and have no real value.
The average FICO (Fair Isaac Corporation) credit score will range from 650 – 720, but will vary depending on which of the three main Credit Bureau’s you are using. Each Bureau tends to collect and report your information in a slightly different way, based on your personal financial history. Also understanding that not all of your information is necessarily reported to each of the three Credit Bureaus, Experian, TransUnion and Equifax.
Using the FICO model for credit scoring, 35% of your score is determined by your history of financial behavior, I.E. your on time payment history, how long it takes for a late payment to be made up, the number of late payments, how often you have used credit, and/or how long it has been since the disposition of a Bankruptcy.
Another 30% of your credit score is based on your Credit Mix. Which is the difference between your total available credit compared to the balances owed on each credit line. This may change each month, depending on the use of your available credit. The lower proportion of balances owed to the credit limit the better your score will be.
Your Length of Credit History makes up another 15% of the credit score, with the number of your most recent applications affecting another 10%. The final 10% of your score is based on the variety of obligations you have, revolving credit or other types of secured loans.
Your Payment History
Your payment history makes up 35% of your credit score. Many believe that the only way to address this area is though the passage of time. At the same time it’s a known fact that as many as 90% of credit reports contain significant errors. In the case of accurate information that is being reported correctly a late payment from five years ago is going to have less affect on your score as, say, a late payment in the last six months. The monitory value of the late payment has no impact on your score. Only the fact that the payment was late. Of course, when a lender considers a new loan the amount of the late payment may influence the decision to make a new loan.
Credit Mix
Very simply this describes how much credit you have available compared to how much you owe. In other words, if your total credit capacity is $10,000 and if what you currently owe is $8,000 you are using 80% of your available credit. Your personal income is not a factor in the evaluation of your credit score. Although when considering the ability to repay a loan the lender is going to evaluate the amount of credit you currently have available, the amount you owe and the income you have to satisfy all of your credit obligations. And this valuation will contribute to 30% of your total credit score.
Length of Credit History
This is an area where a lender looks to see not only what your payment history looks like but also how long you’ve performed with the credit you have. You may have a limited credit capacity though. The longer your credit history, and your ability to manage it, the higher your credit score will be. This will account for 15% of your total credit score. At the same time it is one of the most important was to raise your credit capacity as well. While it’s also important to remember that the more recent the event the more weight it will have on your over all credit score.
Accumulation of Debt
The number of your most recent applications for credit affects 10% of your credit profile. It’s important to use credit wisely and this is where the amount of credit you are applying for comes into play. Although if you are shopping for a major purchase, such as an auto or home mortgage loan, this will not have as great an affect on the scoring model. The negative affect will come if you are shopping for credit in order to meet your needs. In other words, applying for credit in too may places can and will leave the impression that you’re under financial stress. So it’s important to acquire credit with a purpose. Rather than simply because it is offered to you or seems convenient.
Types of Credit
Finally, 10% of the scoring model takes into account the types of debt that you have accumulated. A secured loan is where there is collateral and is an installment loan. Where the loan is secured by a tangible asset. Revolving loans, such as credit cards, are open lines of credit without security or a defined term for the repayment of the line of credit. It’s also important to notice that Finance Companies may have a negative impact as opposed to conforming lenders. Such as Credit Unions, Banks and other traditional lenders.
Score Estimate
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Final Analysis
The most important factor in using credit is to remember that you should always spend and stay within your means. Credit and Debt has become so familiar to us as a culture that it has invaded everything we do. Retailers offer their goods and services at a stated price. But the money lenders offer their services with the percentages in their favor. Every late payment comes with a cost in both your credit score and in real dollars. Including higher interest rates, late fees, over the limit fees, collections, judgments, predatory lending practices, etc. If you are not responsible with credit the consequences can and will be severe, even crippling to you financially.
| Estimated impact of late payments | Not part of your score |
|---|---|
| Current – 12 months = 40% | Income |
| 13 - 24 months = 30% | Marital Status |
| 25 - 36 months = 20% | Length of Residence |
| 37 + months = 10% | Length of Employment |
