How credit is scored

how credit is scored

How Your Credit Is Scored

If you read the real estate section of your local newspaper, you've

probably seen the phrase "credit score" or "FICO score". but you

might not know exactly what it is.

A credit score is a numerical representation of a person's likelihood

of repayment on a loan based on that person's credit history and

credit habits. The score is derived by applying mathematical

algorithms to information contained in the person's credit report.

Bankruptcies, delinquencies, late payments, the total amount of

available credit and how long it has been established, the total

amount of outstanding debt, the number of open credit lines, the

number of recent credit inquiries by potential creditors, the types of

credit in use and other factors are woven into the calculation.

The national credit reporting bureaus: Experian, Equifax and

TransUnion, calculate credit scores using score cards developed by

Fair Isaac and Co. (FICO), then sell the scored to lenders and other

creditors along with reports. Lenders use the scores, and the

accompanying "reason codes" that flag salient factors in the person's

credit history in tandem with the information from the completed

application package, to decide whether a loan application will be

approved and to determine the interest rate, fees and loan terms that

will be offered to that particular applicant.

The thresholds for credit score rankings vary from lender to lender

based on the individuals lender's risk tolerance. Generally, scores

range from 300 to 900, and most people score in the 600-800

range. A score above 720 is believed to net the most optimal loan

terms, while a score in the

500-600 range is thought to potentially

push the applicant into the subprime lending market. Scores in the

low 600s are the most nebulous when it comes to the interest rate

and loan terms.

Contractual relationships among the credit scoring companies, credit

bureaus and lenders prohibit disclosure of credit scores to

consumers. When a maverick online mortgage banker gave

consumers their scores earlier this year, in violation of its contract,

one of the credit reporting companies cut off the banker's utilization

of its credit reporting services.

Mortage Broker and Real Estate Industry legislation pending in

California would require credit reporting companies and lenders in

the state to reveal loan applicants' credit scores to them along with

the reason codes and general explanatory information about the

credit scoring process. Proponents say such disclosures would

shine some helpful light on the loan application process.

Because of pressure from lawmakers and consumer advocates, Fair

Isaac publishes on its website a list of 22 factors that affect a credit

store. You may view this site at

Good credit habits can boost your credit score. Here are a few tips.

-Pay all your bills- no matter how small- on time. Even unpaid fines

for overdue library books, if sent to collection, can show up on your

credit report and lower your score.

-Restrict balances on your credit cards to more than 30% of the

maximum available limit. Spread out the balance over two or three

cards rather than consolidating on one card.

-Don't apply for credit cards all over town. Those one-time

discounts from department stores probably aren't worth the damage


Category: Credit

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