Credit Scoring Basics
Have you heard what is a credit score is? Do you know if there good or bad sides to credit scoring? How is a score calculated and what is "FICO" or "Beacon"?
At the heart of the question, a credit score is a number representing the liklihood that you will repay a loan. Lenders use this number to decide how much loan you quailify for, and what your interest rate should be. Low credit scores can cause higher rates and even loan denials while a higher score can help you receive a better rate on your mortgage and even auto insurance.
Many credit granting agencies utilize computer software designed by Fair, Isaac to calculate your credit score based on criteria the lender selects. The information about you is collected from your credit application and a multitude of other sources. This collection of information is called your credit history.
Your credit history includes how well you have paid your bills, the number and type of accounts you have, late payments, collection actions, outstanding debt, age of your accounts, and other such information. Creditors using the Fair, Isaac statistical program compare this information to the credit performance of consumers with similar profiles and award points for each factor that helps predict who is most likely to repay a debt. So there is where the term "FICO Score" comes from - a credit score based on the Fair,Isaac Company (FICO) repayment predition calculations.
Credit information is weighted based upon its type and history, the more current the information, the more weighty the affect - good or bad. As an example a very old 90 day late may be less weighted than a very recent 30 day late. The type of data is also weighted:
1. Past Payment Performance (35% or at least heaviest weight)
2. Credit Utilization (30% or next heaviest)
3. Credit History (15% or third weight)
4. Types of Credit In Use (10% or least weighted)
5. Inquiries (10% or least weighted).
A FICO score is a snapshot of your credit risk picture at a given point in time and is useful to the lender in deciding what kind of credit risk you are.Fair, Isaac says: "Computers don't make lending decisions, lenders do. Computers analyze credit information to produce a score, but individual lenders decide what scores are acceptable for different loans or credit cards."
The general US population FICO Scores range as follows:
* Above 780 - 20%
* 740-780 - 20%
* 690 to 740 - 20%
* 620 to 690 - 20%
* Below 620 - 20%
Though you may receive a free credit report from each of the major credit burueas once a year from http://www.annualcreditreport.com you will want to know your credit score as well. Purchasing a complete report from Fair, Issac will provide you with a credit history from each of the credit burueas and your FICO Score from each buruea as well.
Roger Sorensen
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