Types of Credit Used
Too many credit card accounts, revolving retail
charge accounts, or loans from certain types of lenders such as
finance companies can have a negative effect on scores.
These are guidelines for the general population. Evaluation criteria
for persons, for example with newly established credit, may be
different.
Lenders may also integrate information from your loan application,
such as your job, length of employment, or whether you own a home.
Certain types of information are not used in compiling a credit
score. U.S. law prohibits race, color, religion, national origin,
sex and marital status from being used in any type of credit
evaluation including scoring. Age is not a factor in constructing a
FICO score but may be used in other kinds of credit scoring. Other
information such as location of residency, interest rates on current
loan obligations, and child or family support obligations may be
used in some credit scoring programs but are not factors in a FICO
score.
FICO scores range from around 300 to about 850. Approximately 1
percent of the population with established credit has credit scores
below 500 and another 13 percent score from 500 to 600. By far the
largest group, 28 percent, is in the 750 to 799 scoring range. About
11 percent of the population is in that rarified area above 800
points. The median credit score (the point where 50 percent rank
higher and 50 percent rank lower) is 723. Americans obviously care
about and take care of their credit.
As stated earlier, a bad
FICO is not necessarily the end of the
road, but it will affect your loan. Soon we will take a look at how
interest rates and other loan features can be impacted by credit
scores and suggest some ways to improve those scores.
·
Number of
(presence, prevalence, and recent information on) various types of
accounts (credit cards, retail accounts, installment loans,
mortgage, consumer finance accounts, etc.)
Please note that:
·
A score
takes into consideration all these categories of information, not
just one or two.
No one piece of information or factor alone will determine your
score.
·
The importance of any
factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for
someone else with a different credit history. In addition, as the
information in your credit report changes, so does the importance of
any factor in determining your score. Thus, it's impossible to say
exactly how important any single factor is in determining your score
- even the levels of importance shown here are for the general
population, and will be different for different credit profiles.
What's important is the mix of information, which varies from person
to person, and for any one person over time.
·
Your FICO score only
looks at information in your credit report.
However, lenders look at many things when making a credit decision
including your income, how long you have worked at your present job
and the kind of credit you are requesting.
·
Your score considers
both positive and negative information in your credit report.
Late payments will lower your score, but establishing or
re-establishing a good track record of making payments on time will
raise your score.
What is not in your score
·
Your
salary, occupation, title, employer, date employed or employment
history.
Lenders may consider this information, however, as may other types
of scores.
·
Your race, color, religion, national origin, sex and
marital status.
US law prohibits credit scoring from considering these facts, as
well as any receipt of public assistance, or the exercise of any
consumer right under the Consumer Credit Protection Act.
·
Your age.
Other types of scores may consider your age, but
FICO scores don't.
·
Any interest rate being charged on a particular
credit card or other account.
·
Any items reported as child/family support
obligations or rental agreements.
·
Certain types of inquiries (requests for your credit
report).
The score does not count “consumer-initiated” inquiries – requests
you have made for your credit report, in order to check it. It also
does not count “promotional inquiries” – requests made by lenders in
order to make you a “pre-approved” credit offer – or “administrative
inquiries” – requests made by lenders to review your account with
them. Requests that are marked as coming from employers are not
counted either.
·
Any information that is not proven to be predictive
of future credit performance.
·
Whether or not you are participating in a credit
counseling of any kind.
·
Where you live.
·
Any information not found in your credit report.
A score takes into consideration all these
categories of information, not just one or two.
No one piece of information or
factor alone will determine your score.
The importance of any factor depends on the overall information in
your credit report. For some people, a given factor may be more
important than for someone else with a different credit history. In
addition, as the information in your credit report changes, so does
the importance of any factor in determining your score. Thus, it's
impossible to say exactly how important any single factor is in
determining your score - even the levels of importance shown here
are for the general population, and will be different for different
credit profiles. What's important is the mix of information, which
varies from person to person, and for any one person over time.
Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision
including your income, how long you have worked at your present job
and the kind of credit you are requesting.
Your score considers both positive and negative information in your
credit report. Late payments will lower your score, but establishing
or re-establishing a good track record of making payments on time
will raise your score.
History of credit scores
Credit scores came into
wide use in the 1980s. Long before credit scores, human judgment was
the sole factor in deciding who received credit. Lenders used their
past experience at observing consumer credit behavior as the basis
for judging new consumers. Not only was this a slow process, but it
was also unreliable because of human error.
Lenders eventually began to standardize how
they made credit decisions by using a point system that scored the
different variables on a consumer's credit report. This point system
helped to eliminate much of the bias that previously existed;
however, it was still tied to intuitive measures of creditworthiness
and was not based on actual consumer behavior.
Credit granting took a huge leap forward when
statistical models were built that considered numerous variables and
combinations of variables. These models were built using payment
information from thousands of actual consumers, which made scores
highly effective in predicting consumer credit behavior. When
combined with computer applications, scoring models made the credit
granting process extremely fast, efficient and objective,
facilitating commerce and helping consumers quickly get the credit
they need.
Tips for Improving Your Score
-
Monitor your
credit report
and dispute
errors. Errors in your report will usually translate into a low
score.
-
Pay your bills
on time
even if it
means you can only pay the minimum amount due.
-
Low balances
are a positive factor in scoring models. Don't
use all your available credit.
-
New credit
applications can detract from your score. Even an
application for a department store card can lower your score.
Multiple applications can have a devastating effect on your
score, especially around the time you are shopping for major
purchases like a car loan or mortgage.
-
Old accounts
(even those you haven't used for a long time) can
help your score. Scoring models look at not just how to use
credit today but also how long you have used credit.
-
Consolidating
balances
or moving debt
around may make for one easy payment, but this can have an
adverse effect on your score. Shuffling of balances could be
especially harmful to your score if you close established
accounts and open new accounts to consolidate your debt.
-
Ask your
lender what scoring model it uses.
With new
scoring models like the credit bureaus'
VantageScore, it is
easy to get confused. A number score alone will not tell you
where you stand.
-
Know the going
interest rates.
Current rates
for mortgages, car loans, and other consumer credit are
published in daily newspapers If you have a good credit score
but are not offered a good interest rate, ask questions,
negotiate, or shop elsewhere.
Mortgage Glossary4
