Thursday, February 28, 2008

What’s behind your credit score?

photo by Wearn

We all know how important it is to maintain a good credit score. But does anyone really know what determines your score? Not really. That is no one except the anaylists at the Fair Isaacs Corporation. FICO the credit score used by most lenders is a creation of Fair Isaacs, which is basically a data analysis company that offers many business analytics in addition to the infamous FICO. The formula used to determine FICO is a trade secret, but they do reveal the following factors that effect your score:

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 history10%--types of credit used (installment, revolving, consumer finance)

10%--recent search for credit and/or amount of credit obtained recently

There are many resources for ways to improve your credit score. Often they’ll focus on a few tactics. Some will tell you close unused cards, others will tell you that’s a bad idea. But, as you can see that the weight of the formula is on punctuality and amount of debt. So if your score is low then focusing on anything but the top two isn’t going to move it much.

And what exactly is a good score? Scores range from the poorest at 300 to the highest 900. According to Fair Isaac the median score is 723. According to Experian (using the Fair Isaac risk model) the average credit score is 678. So you want to shoot for your score on the upper end of the scale.

You should review your credit report at least annually. Order your free copy of your credit report at This site is set up by all three reporting credit reporting agencies: Equifax, Transunion and Experian to enable easy ordering of all their reports.

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