Monday, April 20, 2015

How is a Credit Bureau Score Calculated?

midwest, equity, mortgage

Whether you are looking to open a credit card, finance a car or buy a home...you've probably noticed that your credit score is important. A credit score is essentially used to assess how likely it is that a borrower will repay a loan. The score measures the relative degree of risk that a potential person represents to a lender or investor and is based on several areas of information (however, because of several laws against discrimination - it is not based on gender, race age or zip code.)

Credit Bureaus & Score Range
Fair, Isaac Credit Bureau scores range between 300 to 850 points - the higher the score, the less risk associated with the borrower. Below are the three national credit data repositories that contribute to your score:

  • Equifax - 800-685-1111
  • Trans Union - 800-888-4213
  • Experian - 800-397-3742

Each of these bureaus may offer you a slightly different credit score depending on the data within their own credit profile. Keep in mind that a score is based on all credit-related data - not just negative data.

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Areas that play key roles in your credit score include:

Payment History (35% of score calculation)

  • Bankruptcy, foreclosure and collections
  • Frequency
  • Severity - referring to accounts that are past due
    • 0-6 months =  major effect
    • 7-12 months = significant effect
    • 13-24 months = lesser effect

Outstanding Debt (30% of score calculation)

  • Number of balances being recently reported
  • Average balance shown across all trade lines
  • Current balance vs. Credit line high limit
    • Over 75% Charged = negative effect
    • Less than 35% Charged = positive effect
    • Note - Accounts with small balances score better than accounts with zero balances.

Credit History (15% of score calculation)

  • Age of oldest trade line
  • Number of new trade lines
  • Note - closing older accounts can lower your score more than closing newer accounts

Pursuit of New Credit (10% of score calculation)

  • Number of inquiries and new account openings in the last year
  • Amount of time since most recent inquiry
  • Note - Multiple inquiries for mortgages and auto loans within 30 days are lumped in one single inquiry

Types of Credit (10% of score calculation)

  • The credit bureaus look for a good mix of the following types of credit factors:
    • Bank Cards (Wells Fargo, Chase etc)
    • Gas and Travel Cards (Chevron, Shell etc)
    • Department Store Cards (Macy's, Sears etc.)
    • Installment Loans (Auto or Mortgage)
    • Finance Companies (Jewelry, Furniture etc.) - these are often given a negative score since they are commonly provided to people with substandard credit.

Remember that Fair, Isaac Corp. (FICO) does not use race, color, religion, national origin, sex, marital status or age as predictive characteristics when calculating a credit score. Occupation and length of time in present residence are not included as well. Any other information that is not present in a repository credit file is not included in the calculation.It is important that you regularly monitor your credit score by requesting a credit report from each of the bureaus at least once a year. 

Also keep in mind that "FICO" scores commonly shown on monthly credit card statements are not the "same" scores used for auto or mortgage financing. Talk to your credit professional to learn more about your credit profile and how it can help you qualify for financing. 

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