Want the Entire Credit Score Story
The difference between a credit report and
a credit score is the difference between a chapter and
the entire novel. The novel tells the complete story,
and when it comes time to get a mortgage, you definitely
want to tell your lender as complete a story as possible.
The reason that your score is more important is because
while your credit report says what you have done in the
past, your credit score predicts how likely you are to
pay your bills in the future. Your credit score will also
go a long way to determine what interest rate you will
pay on your mortgage.
"We were looking at how to leverage the information
that is generally available on credit histories and reports
in ways that would benefit lenders," explained Craig
Watts, consumer affairs manager for Fair Isaac Corp. This
is the company that created the first credit score system
back in the 1980s-the one referred to as FICO. "It
was the first general purpose credit risk score. Prior
to that credit scores had been tailored for a specific
company or specific industry," said Watts. "We
proposed broadening it to answer the question: What is
the likelihood that this consumer will become delinquent
in paying back one credit obligation in the next couple
of years?" Mortgage lenders like to see a general
credit score so they can see a person's overall history
and study how they handle all of their obligations. Complicating
the development of a general credit score was the fact
that each of the major credit reporting companiesExperian,
Trans Union or Equifax-structures its report in a different
way, emphasizing different areas.
"We looked really hard at that," Watts says,
"and partnered with each of them to come up with
a general purpose risk score that meant the same thing
and worked on the same scale for each bureau." As
a result, a FICO score based on an Experian report will
be slightly different from one based on a Trans Union
or Equifax report. Lenders, however, know what those differences
are and what they translate into in terms of how likely
a person is to miss a payment.
FICO scores are based on 23 factors grouped into five
distinct categories that are weighed, measured and balanced
in an algorithm-an intricate mathematical formula known
only to Fair Isaac Corp. Watts says that each of those
five categories has a different value. A "perfect"
score would be 800. Lenders prefer to deal with people
in the upper-middle and high 700s, and having a score
in that range would likely make you eligible for the best
mortgage rates available. You can buy a copy of your own
credit report and the FICO score it is given by signing
on to www.myFICO.com. Once there you can buy a report
from any one of the credit reporting agencies, or get
The most important category, the one that counts for
35 percent of the final score, is based on credit history.
The question it answers is: How has the person paid bills
in the past? The equation includes both positive and negative
information. You gain points for not having missed any
payments and lose them if you have missed some. It also
measures the differences between being merely late, missing
a payment or having something repossessed. Next is how
much you owe, and this is worth 30 percent of the final
score. Credit reporting agencies do not know how much
people make or what assets they have. "Instead, we
measure debt against their credit limit. A $20,000 debt
load measured against $20,000 credit limit will score
lower than a $20,000 debt load against a $100,000 credit
"There is a myth," Watts adds, "that the
amount of available credit you are not using has a negative
effect. Not true. If you are maxed out on three credit
cards we will pay attention to that. How you handle money
is much more indicative of what you will do than what
your credit limit is."
The third area-worth 15 percent-is the length of a person's
credit history, and it is an average. If you have had
one account for 20 years (240 months) and five other accounts
for one year each (5 times 12 months) the months would
total 300 divided by six credit accounts for an average
age of 50 months or four years and two months. The last
two categories are each worth 10 points. The first is
the mix of credit accounts. "What we are looking
for is experience managing different kinds of credit.
Having credit cards is good. An installment loan, like
a car, is good. And a personal loan is good. We are looking
for dimension or depth to one's credit experience."
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