Calculating Your Credit Worthiness

Your credit score is a number calculated by applying a sophisticated mathematical model to the credit behavior seen in your credit report. It's a way to more accurately gauge how great of a risk you represent to a lender and the likelihood that you will repay your debts. A numerical score is then developed, typically ranging from 300 to 850, with the low end of the scale indicating a poor credit risk. This can tell a lender whether or not to lend you money. Although there are dozens of scoring models being employed (and more on the way), the most well-known company in the scoring business is Fair, Isaac and Company (FICO). Lenders use FICO scores to calculate interest rates and credit limits. For more on FICO, visit our link, "Who is FICO?"

FICO Scoring

Although the exact formulas for calculating credit scores are closely guarded secrets, FICO lists several approximate factors that make up your score. Current income and employment history do not influence the FICO score. The percentages listed below provide very limited guidance in understanding a credit score.

• For example, the 10% of the score allocated to "types of credit used" is undefined, leaving consumers unaware what type of credit mix to pursue.
• "Length of credit history" is also a murky concept; two factors are the oldest account open and the average length of time other accounts have been open.
• Although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%.

Generic Categories

(Information in green is from FICO website)

35% Payment History

• 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, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due); recent history weighted a bit more heavily than the distant past
• Amount past due on delinquent accounts or collection items
• Time since (recency of) 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

30% Amounts Owed

• Amount owing on accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

15% Length of Credit History

• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity

10% New Credit

• 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

10% 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.)

Interpreting the Percentages

• A FICO score takes into consideration all these categories of information, not just one or two. No one piece of information or 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 than 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 FICO 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 FICO credit score.

Other Factors That Influence Scores

• Any money owed because of a court judgment, tax lien, or similar carry an additional negative penalty, especially when recent.
• Having more than a certain number of consumer finance credit accounts also carries a negative weight (critics say that this causes a vicious cycle, locking people into continuing to use consumer finance companies).
• Bankruptcies, foreclosures, and judgments affect scores substantially, but are not included in the somewhat simplistic pie chart provided by Fair Isaac.

 

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.

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