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Understanding Your Credit Score
The MMI Online Articles are designed to inform, assist, educate and alert consumers.
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Today, most lending decisions are not made by an individual -- they are made by a "credit scoring" system. Your credit score is made up of several pieces of your financial history and is basically a statistical formula creditors use to determine your creditworthiness.
By comparing your information to the patterns in hundreds of thousands of past credit reports, a credit score identifies your level of future credit risk. Some lenders have their own scoring models while others use a generic model from a credit scoring company. The most commonly used and well-known scoring system is from Fair Isaac & Co; they are responsible for your FICO score. Fortunately, you can now receive copies of your credit bureau files from many sources. Under the FACT Act, all consumers are entitled to one free credit report per year from each of the three major bureaus. You can access these reports by visiting www.annualcreditreport.com.
Unfortunately, maintaining a good credit score is not quite as simple as paying bills on time and as agreed. Further, you do not have to have negative information on your application or credit bureau file to be denied credit. While payment history does account for 35 percent of your FICO score, there are several other factors that contribute. Aspects such as payment history, the amount you owe, who you owe, the length of credit history, and any new credit accounts you have all have certain point values. Specifically, the amount owed accounts for 30 percent, the length of credit history makes up 15 percent, new credit is 10 percent and your credit mix (credit cards, store charge cards, loans, etc.) is 10 percent of your score. The number of times you apply for credit and the frequency of these attempts to get credit are also taken into consideration.
While a poor credit score is not the end of the world, if you are seeking a loan, obtaining insurance or applying for a new job, a good credit history can make all the difference. Many employers now check credit histories in addition to performing background checks, as a gauge of an applicant’s responsibility.
If your credit situation is less than desirable, it pays to be persistent and patient; there are no quick fixes. The good news is that scores are continually updated and may move several points each month. Whether your score goes up or down is entirely up to you.
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