Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering numerous factors such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Length of time at present residence
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores computed by data provided by each of the three bureaus--Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.
The FICO Score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Score is calculated.
Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score.
Below are the elements of your FICO score and how they are calculated:
- Payment History 35% (frequency of paying your bills on time)
- Credit Utilization 30% (how much you use credit, compared against debt)
- Credit History 15% (time when you acquired your credit or loan)
- Credit Types 10% (various credits you have such as mortgage)
- Credit Inquiries 10% (how often lenders check your credit)
FICO Scores And What Affect It
What you spend and how often you pay your bills will affect your credit score. Late payments will lower your FICO score. If you do pay your bills on time you will receive better interest rates and credit. Every time you your FICO score, try to take note of the positive and negative areas in your report. Then compare them to the following year to see what changed and how to improve.
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