Credit scores are calculated from a lot of credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart relect how important each of the categories is in determining your score.
These percentages are based on the importance of the categories for the general population. For particular groups – for example, the people who have not been using credit long – the importance of these categories may be somewhat different.
Payment History
Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
Severity of delinquency (how long past due)
Amount past due on delinquent accounts or collection items
Timesince (recentcy of) past due items (delinquency), adverse public records (if any), or collection items (if any)
Number of past due items on file
Number of accounts paid as agreed
Amounts owed
AMOUNT OWING on ACCOUNTS
(Amount owing on specific types of accounts)
Lack of a speciic type of balance, in some cases
Number of accounts with balances
Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Length of credit history
Time since accounts opened
Time since accounts opened, by specific type of account
Time since account activity
NEW CREDIT
Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
Number of recent credit inquiries
Time since recent account opening(s), by type of account
Time since credit inquiry(s)
Re-establishment of positive credit history following past payment problems
TYPES of CREDIT USED
Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
PLEASE NOTE THAT:
A score takes into consideration all these categories of information, not just one or two.
No one piece of information or factor alone will determine your score. The importance of any factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it is impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.
Scoring Models only look at information in your credit report. However, lenders look at many thing when making a credit decision, including your income, how long you have worked at your present job and the kind of credit you are requesting.
YOUR SCORE CONSIDES BOTH POSITIVE AND NEGATIVE INFORMATION ON YOUR CREDIT REPORT.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
HOW CREDIT SCORING HELPS YOU:
Credit scores give lendes a fast, objective measurement of your credit risk. Before the use of scoring, the credit-granting process could be slow, inconsistent and unfairly biased.
Credit scores have made big improvements in the credit process.
BECAUSE of CREDIT SCORES
People can get loans faster.
Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender’s “score cutoff”. Scoring also allows retailstores, internet sites and other lenders to make “instant credit”decisions.
Credit decisions are fairer.
Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.
Credit “mistakes” count for less.
If you have had poor credit performance in the past, credit scoring doesn’t let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called “knock out rules” that turn down borrowers ased solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report.
MORE CREDIT is AVAILABLE
Lenders who use credit scoring can approve more loans because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender’s cutoff for “automatic approval” benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores give lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.
CREDT RATES ARE LOWER OVERALL
With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient nd less costly for lenders, who in turn have passed savings on th their customers. Also, by controlling credit lossesusing scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information–includng credit scores–available to lenders here. Knowing and improving your score can also lead to more favorable interest rates.