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Information on Credit Scores
What is a credit score?
Lenders base interest rates on two factors: the ability and willingness to pay back the loan. For ability, they look at the debt-to-income ratio. For willingness to pay back the loan, they consult the credit score. The most widely used credit scores are FICO scores, and range from 300 (high risk) and 850 (low risk). The higher the risk – the higher the interest rate. Research shows that 40% of Americans have credit scores below 690 and any score below 720 could use help. Credit scores only consider the information contained in the credit profile and were developed as a way to consider only what was relevant to a person’s willingness to repay a loan. They do not consider income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Late payments, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. The score considers both positive and negative information in the credit report. Late payments will lower the score, but establishing or reestablishing a good track record of making payments on time will raise the score.
How a score breaks down
Different portions of a credit history are given different weights. About 35% of a FICO score is based on payment history including late payments on mortgage and consumer accounts, public records, collection items and good payment histories. Approximately 30% of a score is based on the amount owed on all account including the balances owed on different types of accounts, how many accounts have balances and the balanced owed verses the original loan amount. 15% is the time open credit has been in use. In general, a longer credit history will increase a score. About 10% of a score is based on how much new credit and credit inquiries you have. About 10% of a score is based on types of credit in use including credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. The score also looks at the total number of accounts. The credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months to get a credit score. This ensures that there is enough information in the report to generate an accurate score. For a copy of your credit report, call the Annual Credit Report Request Service at 877-322-8228, or go online at www.annualcreditreport.com to order.
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