Your Credit Score: The Essential Facts
Who are the credit bureaus?
I have managed a Florida mortgage company since 1989. We are also licensed Georgia mortgage brokers, Virginia mortgage brokers, and Massachusetts mortgage broker. I also manage a national credit repair business. We speak to people about their credit all day long. There is a common misconception that the credit bureaus are in some way connected to the government. It’s not true ��" they are nothing but big business. There is no government charter or anything of the sort. And yet there may be nothing that has such a profound influence on your financial life.
There are three credit bureaus that matter. They are Experian, Equifax, and TransUnion. Their business is to gather credit data about you and sell it to potential creditors to determine your credit worthiness.
There is a fourth bureau called Innovis that you may hear of occasionally. Innovis is a major compiler of credit data which is used for pre-screening those unsolicited credit card offers we all get in the mail. Mortgage giants Fannie Mae and Freddie Mac contributed to the rise of Innovis in 2001 by demanding that all of their mortgage servicers report borrowers’ pay histories to Innovis. I suspect that we will all hear more about Innovis in the future, but for the moment it has no direct impact on your life.
What is a credit score?
At the moment all three bureaus use a single scoring model called the FICO score. FICO is an acronym for the developer of the score, Fair Isaac and Co. The three bureaus have branded the FICO model for their own marketing so you may hear it called different names. Equifax calls it a BEACON score, TransUnion calls it an EMPIRICA score, and Experian (who seems to lack imagination) calls it the EXPERIAN/Fair Isaac Risk Model.
Why are your three scores different?
Your scores with each bureau are different because each bureau gathers information from a slightly different mix of creditors. If you were to look carefully at your three reports you will notice that some accounts are missing on each bureau. Timing also plays a roll. A recent change in your credit may be picked up sooner at one bureau than another.
What’s included in your score?
As the manager of a Florida mortgage company also offering Georgia mortgage programs, Massachusetts mortgageprograms and Virginia mortgage programs, and a national credit repair company as well, I spend a lot of time analyzing credit reports. Everyone wants to know what they should do to improve their credit scores. The exact method for calculating your credit score is a secret. But Fair Isaac offers a fair amount of information about the essentials. There is a lot of information on your report. And not all categories of information carry the same weight in the score calculation.
Your payment history is the big ingredient. This category includes the obvious installment and revolving debt payments. It also includes public records and collections. The age of any derogatory item in this category diminishes its impact on your score. Fair Isaac indicates that his category makes up 35% of your score.
The balances you owe make up the next category. Different weights are given to revolving versus installment balances. The relationship between the balance and the credit limit on your revolving accounts is a big factor. And the relationship between the current balance and the original balance on installment loans is taken into consideration as well. Fair Isaac indicates that this category makes up 30% of your score.
The length of your credit history is a factor as well. New credit will have a negative impact on your score, and those accounts that you have kept alive and healthy for years have a good impact. This category makes up 15% of your score.
Your new credit and your recent credit inquiries are a factor. If you have new credit or have had your credit run recently you have increased your debt load, or you are about to. Either way you will lose a few points on this one. Fair Isaac weighs this at 10% of your score.
The type of your credit is the last ingredient and the final 10% of the calculation. This is a bit more mysterious. There is some ideal mix of mortgage, installment, retail store cards, revolving accounts, and consumer debt that Fair Isaac will reward. Fair Isaac won’t say exactly what the perfect mix is, but in our experience the key is to build and maintain a well managed balance of accounts, make your payments on time, and try to keep those revolving balances down.
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