With its scale running from 300 to 850, these credit scores are extensively used as a formula by many lenders to determine if you are credit worthy or not. It can be used for mortgage, a car loan, or even employment/tenant purposes.
Scoring Categories
Lenders and the firms offering loans use diverse credit scoring patterns to determine your credibility. As these credit scoring patterns do vary slightly in their formulas, they result in different credit scores. That means credit score of a single person can be different and varied with different scoring models. To bring a certain level of standardization in this process, Fair Isaac Corporation (FICO), developed the first credit score using a standard scale for different parameters. This FICO score has been accepted by all credit scoring institutions as a base platform.
The three major credit bureaus use their own version of the FICO scoring model. These three companies are Equifax, Experian, and Trans Union. Equifax uses BEACON scoring model while Experian uses Fair Isaac Risk Scoring Model and Trans Union has the Empirica Scoring Model. As all three scoring models are different from each other, they result in different credit scores.
Good Score
While the factors on which credit scoring varies, generally individuals with FICO scores above 700 are considered credible. Of course, there is no standardization in black and white narrarating what a good score is; it is believed that the normal average borrower has a credit score in the range of 600 to 700.
A new scoring model known as VantageScore is slowly catching up as a unique scoring method for everyone as all three credit bureaus – Equifax, Experian and TransUnion collaborated on its development. Its scoring ranges from 501 to 990 and has letter grades from “A to F”. So a score from 501 to 600 will correspond to “F” grade while a score of 901 to 990 will receive “A” grade. So in this scoring system, a letter grade of ‘C’ is considered a good credit score.
Factors Affecting Credit Score
As per the FICO scoring model, more than 20 factors in five different categories are taken into consideration to derive your credit score:
1. Payment History – This is one of the most important factors, placing the emphasis on recent activity. It accounts for the 35% of your total score. It is based on payment information on all types of accounts including credit cards, retail accounts and details on late or missed payments. It also considers public records like judgments, suits or bankruptcies and collection items.
2. Amount You Owe and Available Credit – This is the second most important factor and accounts for 30% of your total score. It considers the information regarding the amount owed on all accounts, information related to the accounts showing balances, how much total credit line is used, etc. Here one thing has to be remembered, that carrying debt does not necessarily mean that you have a low credit score. In fact, people with higher scores use their credit sparingly and keep their balances low.
3. Length of Credit History – The longer you have credit, the higher your score. This accounts for 15% of your total credit score.
4. New Credit – The opening of several credit accounts in a short period of time hampers the credit scoring of an individual. This accounts for 10% of the total credit score.
5. Types of Credit in Use – This accounts for 10% of your score and considers your mix of credit types and how many of each you have.
Although credit scores vary with different scoring methods, it provides a standard platform to gauge your credit-worthiness. And even if it is not clear which number can be considered as a good credit score for a specific purpose, it is always advisable to keep your score higher than 700. A person carrying a score of 625 can be scrutinized for mortgage lending, but the same score can be well enough for getting a car loan.
And, remember all scoring models ignore any information that is not proven to be predictive of future credit performance: race, color, religion, sex, marital status, occupation, current interest rates, etc.
For more detailed information on credit scoring, visit www.myfico.com/crediteducation.
Good Score
While the factors on which credit scoring varies, generally individuals with FICO scores above 700 are considered credible. Of course, there is no standardization in black and white narrarating what a good score is; it is believed that the normal average borrower has a credit score in the range of 600 to 700.
A new scoring model known as VantageScore is slowly catching up as a unique scoring method for everyone as all three credit bureaus – Equifax, Experian and TransUnion collaborated on its development. Its scoring ranges from 501 to 990 and has letter grades from “A to F”. So a score from 501 to 600 will correspond to “F” grade while a score of 901 to 990 will receive “A” grade. So in this scoring system, a letter grade of ‘C’ is considered a good credit score.
Factors Affecting Credit Score
As per the FICO scoring model, more than 20 factors in five different categories are taken into consideration to derive your credit score:
1. Payment History – This is one of the most important factors, placing the emphasis on recent activity. It accounts for the 35% of your total score. It is based on payment information on all types of accounts including credit cards, retail accounts and details on late or missed payments. It also considers public records like judgments, suits or bankruptcies and collection items.
2. Amount You Owe and Available Credit – This is the second most important factor and accounts for 30% of your total score. It considers the information regarding the amount owed on all accounts, information related to the accounts showing balances, how much total credit line is used, etc. Here one thing has to be remembered, that carrying debt does not necessarily mean that you have a low credit score. In fact, people with higher scores use their credit sparingly and keep their balances low.
3. Length of Credit History – The longer you have credit, the higher your score. This accounts for 15% of your total credit score.
4. New Credit – The opening of several credit accounts in a short period of time hampers the credit scoring of an individual. This accounts for 10% of the total credit score.
5. Types of Credit in Use – This accounts for 10% of your score and considers your mix of credit types and how many of each you have.
Although credit scores vary with different scoring methods, it provides a standard platform to gauge your credit-worthiness. And even if it is not clear which number can be considered as a good credit score for a specific purpose, it is always advisable to keep your score higher than 700. A person carrying a score of 625 can be scrutinized for mortgage lending, but the same score can be well enough for getting a car loan.
And, remember all scoring models ignore any information that is not proven to be predictive of future credit performance: race, color, religion, sex, marital status, occupation, current interest rates, etc.
For more detailed information on credit scoring, visit www.myfico.com/crediteducation.
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