More on Credit Score

To continue from yesterday's post on credit scores, today I will shed more light on what makes up the score. Banks and other institutions using such scores as a factor in their lending decisions may deny credit, charge higher interest rates, demand more collateral, or require extensive income and asset verification if the applicant's FICO credit score is low.

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 of each:

• 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
• 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
• 15% — length of credit history
• 10% — types of credit used (installment, revolving, consumer finance)
• 10% — recent search for credit and/or amount of credit obtained recently

Bankruptcies, foreclosures, and judgments also affect scores substantially. Current income and employment history do not influence the FICO score, but they are weighed when applying for credit.

There are other special factors which can weigh on the FICO score.

• Any money owed because of a court judgment, tax lien, or similar carry an additional negative penalty, especially when recent.
• Having more than a certain number of consumer finance credit accounts also carries a negative weight (critics say that this causes a vicious cycle, locking people into continuing to use consumer finance companies).
• The number of recent credit checks also can weigh down the score, although credit agencies usually claim to allow for credit checks made within a certain window of time not to aggregate, so as to allow the consumer to shop around for rates.

There are additional credit scores such as NextGen score and VantageScore. VantageScore is the attempt by the major three credit-reporting agencies to be more consistent, because the score from one agency to another can be 50 points off or more. VantageScore goes from 501-990 and assigns a letter grade (A-F) to score specific ranges. The ranges are as follows - A (901-990), B (801-900), C (701-800), D (601-700), and F (501-600).

Many lenders will check an applicant's score from each bureau and use the median score to determine the applicant's credit worthiness.

Tomorrow there will be more information on how to improve your credit score. Stay tuned ...

Solomon replied, "If he shows himself to be a worthy man, not a hair of his head will fall to the ground; but if evil is found in him, he will die." I Kings 1:52 (NIV)

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Email: DeltaInspire@panama-vo.com