whatismycredit-score.info

Your credit score is a number (usually 3 digits) generated by computer that matches your past credit behavior with a bunch of statistical data and then attempts to predict whether or not you will pay your future bills on time.  The resulting number, often called your FICO score, is used by banks, insurance companies, mobile phone providers and even your landlord to help them decide whether or not to work with you and if so how much to charge.

While FICO scores are not the only credit scores you will come across these days, the FICO brand was the first to offer computer generated credit scores and is by far the most common.  As a result, many people use the term ‘FICO’ interchangeably with Credit Score like one would with Aspirin, Coke or many other household products.  The name FICO is actually an acronym for Fair Isaacs Corporation, a company that was founded in the 1950’s by an Engineer named Bill Fair and a Mathematician named Earl Isaacs.  Their program uses a sophisticated set of algorithms and statistical data to forecast future credit behavior.  During the late 1980’s the company went public and the idea of computer assisted credit evaluation took off like wild fire.  This new technology was just the ticket for banks in a time of financial deregulation, rising home prices and access to lots of money to lend.  Automated credit scoring allowed banks to quickly and accurately assess credit risk and price it accordingly.  The three main credit bureaus TransUnion, Experian and Equifax also embraced the idea and provided the lending industry with FICO scores as part of their regular credit reporting services.

FICO scores typically range from the low 300’s to the high 800’s.  Generally, scores over 700 are considered excellent and scores under 600 are considered high risk.   It is not uncommon for each of the three credit bureau’s to calculate three different scores for the same borrower.  This is because each credit bureau maintains slightly different credit information.  For larger loans, banks usually use a tri-merge credit report which combines information and credit scores from all three credit bureaus to make sure none of the borrower’s credit history is overlooked when making a credit decision.  When there are three scores, the lender will usually use the middle score.  In the case of a joint credit report, as with a borrower and spouse for instance, there would be six separate credit scores.  In this case, the lender would probably use the lowest middle score of the two borrowers.

The credit scoring model looks at just five factors, all of which are derived directly from the credit report.  These factors are: payment history, outstanding debt, credit account history, recent inquires and types of credit.  Your credit score will never be influenced by race, religion, gender, nationality, where you live, who you work for, etc..  The model will only score you on whether or not you have made past credit payments on time, how much debt you currently have, how long you have had your credit accounts, how many lenders you’ve been contacting lately and whether your revolving accounts are in proportion with your installment loans.

If you are one of those who have a 700 score or higher, that’s great!  Keep it up!  If you find that your credit score is lower than you would like, don’t lose heart, credit scores are not the only criteria lenders use to make loan decisions.  Plus, there are many things you can do to push your score higher over a few months time.  It’s a good idea to get a copy of your credit report and review it to make sure there is no false information or inaccuracies listed on it.  You are entitled by law to receive one free report from each of the three credit bureaus once per year.  If you find discrepancies on your credit report, be sure to have them removed by all three of the credit agencies.  Another way to help raise your score is to pay down accounts that are near the maximum limit.  Don’t pay off or close existing accounts that have a good payment history.  Leaving these accounts open with a zero balance can only help your score.  You can find lots of good advice on the internet about how to repair credit and improve your credit scores.  Here are a few suggested links.

What is my Credit Score?

When you apply for a loan, the lender loads your credit information into a computer and runs it on a specialized software program that assesses your credit history and scores your credit profile using a complicated statistical model.  The resulting score is your Credit Score.

From the lenders stand point, your credit score reflects the amount of risk they will be accepting by giving you a loan.  It doesn’t matter whether you’re applying for a credit card, car loan or mortgage most lenders use the same statistical credit scoring system to calculate a three digit number commonly known as a FICO score.

Why do I have three scores, if they all use the same system?

If you look at a copy of your credit report, you may see not just one but three separate FICO scores listed.  There are three FICO scores because there are three main credit bureaus used by financial institutions in the United States.  They are TransUnion, Equifax and Experian.  These three credit bureaus collect, organize and report information that is sent to them by creditors and government agencies.  Since each of the three bureaus don’t all collect the exact same information at the same time, your scores might vary from one bureau to the other at any particular time.

Lenders often request a tri-merge report that combines the records of all three credit bureaus so they can be sure all your credit history has been considered in the lending decision.  The combined report is then used to determine how much you can borrow and at what interest rate.  Don’t count on the lender averaging all three scores, however.  Typically, lenders will use the middle score to rate your credit.  If your credit report is joint with a spouse, there might even be six scores to consider, in which case, the lender will typically use the lowest middle score between both borrowers.

Why is it called a FICO score?

Credit scores are referred to as FICO scores because each of the three credit bureaus agreed to use the same computer software program to calculate scores.  The program was developed by Fair Isaac Corporation, named after its two founders, Mr. Fair and Mr. Isaac.  The company’s product name ‘FICO’ is an acronym.

Does everyone have a FICO Score?

In order for the system to calculate your FICO score, you must have at least one credit account listed on your credit report and it has to have been open for at least six months.  Also, the account has to have been reported to the credit bureau within the past 6 months.  These guidelines insure that the information used to calculate the score is recent and relevant.  Each of the three credit agencies must have this minimum amount of information to calculate a score.  For example, if two of the three credit bureaus have the record but the third one doesn’t have any records, only two FICO scores will be available to the lender.

How is the FICO score used?

Lenders started using FICO scores in the late 1980’s as a way to quickly and uniformly assess future credit risk.  A high credit score indicates less risk in making the loan and a low score suggests a higher chance of default.  The model is based on a set of complex algorithms that weigh the borrower’s credit information against statistical data to calculate a score.  FICO scores range from the low 300’s to the high 800’s.   Nearly all financial institutions today have adopted FICO scoring models to assist in making lending decisions, each using its own strategy of how much risk is acceptable with their various types of financial products.  While many people try to connect an A – F type of scale to the credit score range, lenders can vary greatly on the scores they will accept.  Most agree, however, that a score of 700 and above indicates an exceptional borrower while a score of 600 and below suggests the borrower may not manage their finances all that well.  There are many additional factors, however, used by lenders to make the final credit decision.

While the FICO credit scoring model is by far the most widely used system, lenders also use their own proprietary scoring models in tandem with the FICO model often allowing their own system to supersede the FICO system.  FICO scores can also be called by different names such as Beacon® Score, Empirica® score or Fair Isaac Risk Model.  But, these are only trademark names that the credit bureaus have given to the FICO product in an attempt to differentiate themselves from the other bureaus.

Lenders aren’t the only businesses that utilize credit scores to forecast risk when making business decisions.  The insurance industry has also found credit scores useful to price products like auto insurance and employers now use FICO scores to screen new employees.  Landlords also use credit scores to qualify their tenants.

So, what is your Credit Score?

In general, when people refer to “your score”, they are referring to your current credit score which can change frequently depending on your credit activity.  Many times in the initial stages of a credit purchase, the sales person or lender will ask “what is your FICO score?”   If you don’t know your current score, you may allow them to pull your credit to find out.  Once you know a recent score however, try to limit any unnecessary inquiries since too many will ultimately lower your FICO score.

If you happen to have low scores, the good news is, there are ways to raise your scores over time or in some cases even over night.  By reviewing your credit report, sometimes you will find false or inaccurate information.  By having this information removed or corrected with all three of the credit bureaus, you can immediately improve your credit scores.  If your scores are low due to legitimate reporting, there are also ways to improve your scores by paying down accounts near the credit limit or by requesting ‘goodwill deletions’ for late payments.  Therefore, your FICO scores a few months ago may not be the same as it is today or will be tomorrow.  In addition, always remember that your FICO scores are not the only factor a lender will use to make a credit decision.

What do baseball, bowling and borrowing all have in common?  If you guessed funny looking shoes or stretching part way through the game, you may be right, but only if your banker still wears wing tips and the stretching you’re referring to is your paycheck month to month.  Actually the answer we were looking for is that baseball, bowling and borrowing all deal with scores of 300 +.  The difference however, is that in baseball a 300 batting average is considered excellent.  In bowling, a 300 score is perfect, but in borrowing a score of 300 will send you back to the dug-out hat in hand.  That’s because credit scores range from the low 300’s to the mid 800’s.  A higher score tells the lender that you are more likely to pay your bills on time.  Many couch sitting quarterbacks think they know all about credit scoring but for the rest of us who are asking “just exactly what is my credit score?”  Let’s take a closure look together and see how it all plays out.

A Short history on the Credit Scoring Game

Credit Scoring is a system used by lenders to evaluate a potential borrower’s credit behavior.  This system became widely used in the late1980’s as a uniform way to quickly and accurately estimate creditworthiness.  The resulting 3 digit depiction of your credibility became known as your FICO Score, an acronym derived from a company started in 1956 by Engineer, Bill Fair and Mathematician, Earl Isaac. The company went public in 1987 and became the Fair Isaac Corporation, thus, the term FICO was born.  The seemly arbitrary nature of the mysterious black box calculations have often caused consumers to judge whether the FICO system is fair play or out of bounds.  Credit scores are usually generated by the three major credit bureaus, TransUnion, Experian and Equifax.  While these agencies maintain the credit records, it is actually FICO that controls the mechanism that creates the score.  The credit bureau simply applies compiled information to the FICO statistical model.  You might ask, “Doesn’t this give the FICO company a home team advantage being the only company calculating these life-changing scores?  Yes, but you will be happy to learn that this is changing with lenders and even the credit bureaus themselves beginning to develop and use their own credit scoring models.  Still FICO will undoubtedly survive as a generic trademark and join the ranks of Coke, Yo-Yo and Aspirin.

What is my Credit Score?

During the past 25 years, FICO scoring has become a big hit with lenders and the system is even finding its way into other industries as well, like your car insurance.  Now days, thousands of different credit scoring formulas have been developed for all kinds of purposes.  They are created with unique algorithms designed to calculate which customers present the most risk over time.   It isn’t just a borrower’s errors that affect the score, the system takes your RBI’s into account as well.   The model will attempt to compare and balance the negative and positive attributes of your credit to calculate the score.  Consumers can now access online tools that enable us to run the FICO calculation for ourselves allowing us to improve our score in advance of getting a new loan.

How do I get my game on?

As indicated above, the credit scoring model uses information obtained from your credit report.  Your individual FICO score is the result of your unique credit profile which is constantly in flux.  Your credit score reflects payment patterns over time with more emphasis on recent activity. Here are the key factors to focus on:

• Payment history – Do you pay your bills early or at least on time?  Your payment history is one of the most important factor in your score!
• Outstanding debt: – Are your balances near the maximum limit?  If so, make an effort to get them down below 35% of the limit if possible.
• Credit history – Think twice about closing good accounts!  Well seasoned open accounts with low balances well definitely improve your standing.
• Recent inquiries – Others pulling your credit will foul up your score.  Try not to apply for unnecessary lines of credit.
• Types of credit – Try balancing your profile with various types of loans.  The scoring model will treat Installment debt differently than revolving debt.

If you really want to be a pro at managing your credit score, there are many specific techniques that will help you to hone your skills.  These may include:

• Taking precautions to protect your personal information from fraud and identity theft.
• Frequently monitoring your Credit Report and taking steps to remove inaccuracies and negative items that can be arbitrarily reported including public records.
• Contacting your creditors and asking them to expunge actual derogatory information as a good-will deletion.
•  Ask your credit reporting agency to perform a “Rapid Re-score”.  There is no instant way to improve your score with regard to valid claims on your credit report, but if you are able to get your creditors to revise critical items, your updated credit profile may be able to be re-run for a new score.

Keep your eye on the ball

Don’t worry about things that don’t have any effect on your score.  Your FICO Score will not be influenced by:

• Your age, race, color, religion, national origin, sex or marital status
• Where you live and how long you have lived there.
• Your own credit inquiries, inquiries related to employment or unsolicited promotional “pre-approved” or account review inquiries.
• Your salary, occupation, title employer, date employed or employment history (while these items don’t affect your score, these factors will probably influence the lending decision).

Prior to making a major credit purchase, go online and check your scores at all three major credit reporting agencies.  If you begin a few months ahead of time, you will be able to identify any weaknesses and make adjustments that will put you back in the game.  If your credit score is over 700, there is probably no need to try for perfection   A score under 650 however, could put your plans in the gutter.  Don’t be discouraged, if your score is low, try these strategies for a month or two and things should change up for the better!  Also remember, in the final game, your credit score is not the only factor your lender will be considering to evaluate your financial standing.