Understanding how your Credit Works

credit scoreCredit scores were developed by Fair Isaac and company (FICO). The models created using FICO take all the detailed information about your credit report and produce your credit score using different weights and factors contained in the FICO scoring models.

The purpose of a FICO score is to show how likely you are to become at least 90 days late in making payments in the next 24 months based on patterns in your credit history, compared with patterns of millions of past customers.

Fair Isaac divides the scoring range into five risk categories.

  • 780-850 Low Risk
  • 740-780 Medium, Low Risk
  • 690-740 Medium Risk
  • 620-690 Medium High Risk
  • 620 and Below High Risk or “Non Prime”

Each of the three major credit bureaus uses their own version of the FICO scoring model. Factors influencing your credit score are:

  • Current or late payments
  • How late the payments are
  • Number of open accounts you have
  • How much credit you are using in relation to how much credit you have available
  • If there are serious delinquencies on your file like bankruptcy, liens and charge off accounts

Your credit score is a snapshot, in that it is developed at the time of inquiry by a credit grantor pulling your credit file. Your credit score can change with the passage of time as well as with the addition of new information to your credit file. As delinquency information in your file ages, it’s negative affect on your credit score lessens.

Credit Scoring uses the following five areas of information to calculate the score:

  • Payment history 35%
  • Amounts owed 30%
  • Length of credit history 15%
  • New credit inquiries 10%
  • Type of credit used 10%

It is best to keep balances low on credit cards and other revolving accounts – maintain balances below 50 of the available credit limit. 24 is optimal. The best way to improve your score is to pay down revolving debt.

An inquiry is defined as a request by a lender for a copy of an applicant’s credit report. Inquiries remain on a credit report for two years, but credit scores only look at inquiries in the last 12 months. Your own request for a credit report to review for accuracy is not considered in your credit score.

Apply for new credit accounts only when you need them. Remember that closing accounts does not make them go away. A closed account with a poor payment history may become a more recent account because the date of activity will change. An open account with a low or zero balance is better than a closed account.

HELPFUL WEBSITES FOR YOUR REFERENCE: You can obtain your free annual credit report, without a FICO score, at www.annualcreditreport.com

To contact the credit bureaus:

Experian  1-888-397-3742   www.experian.com

Equifax  1-800-846-5279 www.equifax.com

Transunion  1-800-916-8800  www.transunion.com

DID YOU KNOW??
  1. FICO scores are used not only for a mortgage and credit cards, but for auto loans, insurance and utilities.
  2. Credit reports reflect charge offs or collection accounts for up to 7 years, and bankruptcies for up to 10 years.
  3. You can order a free credit report annually, at no charge, without impacting your credit score.
  4. Having a minor balance without missing a payment is better than closing an account.
  5. Paying off an old collection may result in a drop in your credit score.
  6. Consolidating credit cards increases your ratio of debt to available credit and lowers your score.
  7. Using the maximum amount on a credit line can drop your score by 100 points.

question manFor more information regarding financing or the economy, please call or email me at any time.  I can be reached via email at Bill’s Email or call me at 978-273-3227.

A Cold Ride
Bill Nickerson Training for the Pan Mass Challenge

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Please leave a reply. Thank you! Bill

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