How Your Credit Score is Calculated.
December 17th, 2007 Categories: Buyer and Seller Knowledge Center
Fair, Isaac criteria for calculating credit scores are divided into five areas:
Payment History
Credit card payment history, retail accounts, installment loans and mortgages accounts for 35% of the total score.
Amount Owed
What is important is how many accounts have balances and how much of the total credit line is being used on credit cards and other revolving credit accounts. This accounts for 30% of the total score.
Length of Credit History
Credit history accounts for 15% of the total credit score. It is suggested that parents start their children on credit before the youngster leaves home.
Types of Credit
Types of credit takes into account the mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. This accounts for 10% of your total score.
The Rest Is Calculated by:
Salary is definitely considered but other items considered in the composite number includes:
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Education level. A person with a college degree gets more points than a high school graduate.
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Number of years you’ve lived in a single location. If you have moved around a lot, you lose points. If you have moved because of better-paying job, you can recoup some of those points if your salary has increased.
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Years spent with an employer. Scoring agencies like people who are stable. They assign more points to people who have lived in a particular place for several years or who have worked for a single employer for many years.
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Home ownership. If one owns a home you get additional points. Renters are considered more transient and less reliable for the repayment of loans.
Change is coming.
The system at times appears to be arbitrary and unfair to some but lenders insist that the scoring system is not biased or unfair to minorities but that it simply reflects overall lending histories.
With the pending FICO scoring change to be introduced in the first quarter of 2008 there may be an increase in the critisism of FICO scoreing. It is currently planned those with thin credit will be will be measured lower than those with more active credit accounts.
The added score parameters can help those who have a variety of cards, a mortgage and a car payment since as proposed these people will be graded higher. The thinking is these people can better manage credit.
The flip side is, if these individuals show that they are using most of their available credit they will be scored lower.
