Understanding the Ins and Outs of nYour Credit Score
As recent as a few years back, the term "Credit Score" was not very commonly used in our society. Today,
however, due to a number of factors such as increase Identity Theft and mass media marketing campaigns
there are very few who are not aware of the term Credit Score. The goal of this article is to add
understanding on the personal to the recognition of that term.
credit, credit repair, credit score, debt consolidation
As recent as a few years back, the term "Credit Score" was not very commonly used in our society. While
there were who understood the term and its purpose, the mass majority, although realizing that there was a
system out there that their credit, they did not have a term to stick to it.
Today, however, due to a number of factors such as increase Identity Theft and mass media marketing
campaigns there are very few who are not aware of the term Credit Score. The goal of this article is to add
understanding on the personal to the recognition of that term.
A Credit Score is a number between 300 and 850 based on a statistical analysis of an individual's credit
activity. It is used to represent the credit worthiness of an individual. How likely that the individual will pay
his or her debts. A credit score is based on their credit report information which is typically sourced from
credit bureaus and credit reference agencies, typically from the three major credit bureaus.
Lending institutions, such as banks, finance companies, mortgage lenders, and credit card companies, use an
individual's Credit Score to evaluate the potential risk posed by lending money to that individual. Lenders
use Credit Scores to determine who qualifies for a loan, at what interest rate the loan is issued, and what
credit limits are determined.
The use of credit scoring prior to granting credit is a trusted system throughout the industry. Credit scoring
is not limited to banks, however. Organizations, such as mobile phone companies and government
departments employ the same techniques.
While there are many others, such as NextGen, VantageScore and the CE Score, The most widely known
score in the United States is FICO, which is most widely used in the mortgage industry. FICO is an acronym
for Fair Isaac Corporation, the company that provides the most well-known and most widely used credit
scoring system in the United States.
The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in
one's credit file and is primarily used in the consumer banking and credit industry. FICO scores show how
likely it is that a borrower will default. No public information is available to determine what the scores mean
in terms of statistics. A separate score, BNI, is used to indicate likelihood of bankruptcy.
As stated, banks and other lending institutions use Credit Scores as factors in their lending decisions.
Whether credit is denied or approved, what interest is charged, what income level and asset verification is
required is all based on an individual's credit score.
The FICO score actually uses slightly different scoring methods to rate a consumer's suitability for three
different types of credit; mortgages, auto loans, and consumer credit. Each reflecting the different credit
risks of these various types of lending. It is not unusual for these scores to differ by as much 50 points or
more for the same borrower.
There are three major credit reporting agencies in the United States. Although often times inaccurately
referred to as "credit bureaus", these agencies; Equifax, Experian and TransUnion, also calculate their own
credit scores. These additional scores differ depending on what they are meant to predict, what statistical
methods used to determine a score, and what information is used and how it is weighted.
These additional Credit Scoring Systems are numerous and are agency specific. For example, Beacon,
Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax. Empirica, Empirica Auto 95,
Precision Score, and Precision 03 are available only from TransUnion. And, Fair Isaac Risk Score at
These various Credit Scores are developed for the different agencies by Fair Isaac, each differs and are
periodically updated to reflect current consumer repayment behavior habits. The NextGen Score is a scoring
model designed for consumers.
In an effort to make credit scoring more consistent across the board, in 2006 the big three credit reporting
agencies introduced Vantage Score. Vantage Score uses a different number range from the FICO score. It
ranges from 501 to 990 and also assigns letter grades from A to F to specific ranges of scores.
A consumer's Vantage Score may differ from agency to agency, but the difference would be entirely due to
differences in the information reported to the various agencies, not due to differences in scoring systems.
Since FICO is still widely used by lenders, the agencies continue to offer FICO scores (or their closest
equivalent) as well.
Most credit scores use a multiple-scorecard design. Each version may use individual scorecards, and an
individual potential borrower is typically compared with other previous borrowers. In other words, a
borrower with one 30-day late payment will be scored against a population with some similar delinquency.
A borrower with two 30-day late payments will be scored against a population with like credit faults. The
individual is then graded according to which variables indicate a risk within that group.
Nearly all large banks also build and use their own systems for credit scoring purposes, and are often times
in conjunction with outside scoring formulas.
The systems used to generate credit scores are subject to federal regulations. The Federal Reserve Board's
Regulation B, which implements the Equal Credit Opportunity Act, expressly prohibits a credit scoring
system from considering any "prohibited basis" such as race, color, religion, national origin, sex, or marital
status. It also stipulates that credit scoring systems must be "empirically derived" and "statistically sound".
In addition, if an adverse action, a denial of a credit application, is taken as a result of the credit score then
the specific reasons for the denial must be provided to the individual denied. The statement "credit score not
high enough" is insufficient. The reasons for denial must be specific; "too many delinquencies 60 days or
greater" and such.
Credit scores are designed to measure the risk of default by taking into account various factors in a person's
financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, the
Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution
<li>35% punctuality of payment in the past (30 Days Past Due)</li>
<li>30% the amount of debt, expressed as the ratio of current revolving debt to total available revolving
<li>15% length of credit history</li>
<li>10% types of credit used</li>
<li>10% recent search for credit and/or amount of credit obtained recently</li>
These percentages offer a limited guidance in understanding a credit score. For example, the 10% of the
score allocated to "types of credit used" is undefined, leaving consumers unaware what type of credit mix to
pursue. "Length of credit history" is also a murky concept; it consists of multiple factors two being the
oldest account open and the average length of time an account has been open.
Interestingly, although only 35% is attributed to punctuality, if a consumer is substantially late on numerous
accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments affect scores
substantially, but are not included in the very vague pie chart provided by Fair Isaac.
A FICO score generally has a max of 850 and a minimum of 300. It exhibits a left-skewed distribution with
a median around 723. The performance of the scores is monitored and the scores are periodically aligned so
that a lender normally does not need to be concerned about which score card was employed.
Because the three major credit agencies have their own, independent databases, each of us actually has three
credit scores for any given scoring system. As these databases are independent of each other, they may
contain entirely different data. Many lenders will check an applicant's score from each bureau and use the
median score to determine the applicant's credit worthiness.
As a result of the FACT Act (Fair and Accurate Credit Transactions Act), each legal U.S. resident is entitled
to one free copy of his or her credit report from each credit reporting agency once every twelve months. To
guard against inaccurate information or fraud more often than yearly, one can request a report from a
different credit reporting agencies available on the net. This information is available from a number of
websites across the net that offer an free credit report and use of their services for 30 days. After which,
there is a monthly fee involved. The fee is nominal compared to the necessity of protecting your credit in
today's highly technological society where identity theft is becoming more prevalent.
In a time where identity theft and credit fraud in on the rise, the fee these firms charge seems like a small
amount to pay to protect your credit and your good name. Having a good Credit Score is becoming more
and more prevalent in our society. Here are a few examples of how:
In September 2004, TXU (a Texas utility company) announced it would begin setting individualized
electricity prices based on credit score. However, due to negative press and pressure from the Texas Public
Utility Commission, the plan was not implemented.
Credit scores are often used in determining prices for auto and homeowner insurance. Recently, some of the
agencies that generate credit scores have also been generating more specialized insurance scores, which
insurance companies then use to rate the quality of potential customers. These scores are unavailable to
Many employers reserve the right to do a credit check of job applicants, in the same manner they reserve the
right to drug test potential employees. the fact is that your Credit Score is important. Rebuild-Credit.us is a
sight committed to providing consumers with quality information concerning credit, how to get it, and how
to maintain a quality credit score. It is recommended you take the time to visit them and read through the
numerous articles and reports there.
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