Credit Report Score Calculations

What is credit scoring?

In simple terms, credit score is your financial personality profile. The same way dating services refer to your personality profile to find compatible matches, the financial institutions refer to your credit score to fine compatible loans and credit. Credit scoring is supposes to be mathematically calculated and unbiased and it is a way for lenders to determine the level of risk they are assuming by extending credit to you.

What institutions uses credit scoring?

Credit scoring has been around since 1950s and started to evaluate risks associated with car loans and credit cards. Today most creditors including mortgage lenders use it.

What is credit score range?

Credit score also known as FICO (Fair Isaac & Co.) score is a number between 300 and 850. For potential creditors, scores closer to 850 indicate more or less flawless financial ability and habit of the borrower to pay the loan back and make money for the lender. I wonder did all these sub-prime loan lenders ever heard of the credit score or credit worthiness.

The following are some explanation of what different FICO scores
* Excellent: Over 750
* Very Good: 720 to 750
* Acceptable: 660 to 720
* Uncertain: 620 to 660
* Risky: less than 620

What influences FICO Score?

This credit score number is a relative number which means it is more or less objective. Relative means that your financial habits are compared to others in similar situation. It assigns numbers to how you treat money, how you pay your bills, number of credit accounts you have, the type of credit you have, do you have collection action against an account, etc.

The objective part means that the mathematical calculations do not care about your look, your sex and or your religion. The lenders only want to know the possibility of you paying them back in time and without any problems.

The FICO score calculations assign approximately the following numbers.

35% for your payment history: Paying bills on time, delinquent payments, consistently late payments, collection notices and bankruptcy make up about 35% of your credit score.

30% for total debt: How much of the total money you can borrow have you borrowed? Have you maxed out your credit cards, if so, lenders may think you are on the verge of an ominous financial problem.

Credit history length counts for approximately 15% of your credit score calculation. Did you start your financial profile yesterday or twenty years ago? Longer credit history has a positive impact on your credit score.

New debts build about 10% of your credit score. If you are taking on more new debts or even applying for new cards too quickly, you may be lowering your credit score.

Types of credit you use counts for another 10% of your credit score. Do you have two loans, one for your home and the other for a rental or do you have ten unsecured credit cards. High credit cards and installments loans to mortgage ratio impacts on your credit score in a negative way.

Four effective tips to improve your credit score:

* Pay all your bills especially your mortgage and your installment loans on time.
* Do not max out your credit cards.
* Limit your credit cards to two or three credit.
* Avoid applying for several credit cards at one time.

Recommended reading:

Credit Secrets Bible

Your Credit Score: How to Fix, Improve, and Protect