The Dissection Of A Credit Score
- Information provided by myFICO.com and Land America Credit Services

Your credit plays a critical role in your financial life, but understanding what credit is and understanding your individual credit score can be challenging. Following is educational information to help you understand the role credit plays in your life, and ways to empower yourself as a consumer.

Your credit score is a number based on the information in your credit history designed to predict the likelihood that you will get a 90 day late on any credit line in the next 24 months, or in other words how likely you are to stay current on all your loan payments - the higher your score, the less risk you represent. The credit score that lenders use is called a FICO score. This score helps a lender determine whether you qualify for a loan and what interest rate you'll pay based on how risky their investment in you is.

Scores are broken out into ten different categories; the first eight of which are good, and the last two being reserved for risky or “bad” credit. If someone gets one 90-day late on any payment they are automatically scored at step nine. Bankruptcy automatically earns an individual a place at step ten.

Your credit report shows the information you have on file at one or all of the three major credit reporting agencies - Equifax, Experian and TransUnion. Each of these reporting agencies (also known as credit bureaus) maintain their information separately, so the data you have on file may differ slightly between them. Additionally if something should be removed, each agency must be contacted separately. Lenders often obtain your score from all three agencies, and then throw out your high and low scores.

Q. What information is included in my credit score?
A. For the mortgage industry, the absolute highest possible score is 850 (for the auto industry it is 900). The median score in the USA is 720 (50% higher, 50% lower). To earn a score you must have the following minimum qualifiers:

1. One trade line at least six months old or more
2. One trade line that has been updated in the last six months (has a charge or payment made on it)

FICO scores are calculated from a lot of different credit data in your credit report, which can be grouped into five categories. Each category is weighted by percentage, reflecting how important each category is in determining your score.

• Account payment information (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
  
  
• Any 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, 30/60/90 days) and amount past due on delinquent accounts or collection items.
  
  
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any) – 0 to 6 months is most significant.
  
  
• Number of past due items on file.
  
  
• Number of accounts paid as agreed.

• Amount owing on accounts
  
  
• Amount owing on specific types of accounts
  
  
• Lack of a specific type of balance
  
  
• Number of accounts with balances
  
  
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts - amounts in excess of 50% of available credit are unfavorable).
  
  
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

• Time since accounts opened (age of oldest trade line and number of new trade lines)
• Should have no more than three credit cards
• Opening new credit card lines reduces your credit history
  
• 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

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.) OPENED and CLOSED
  
• Finance company installment accounts are always bad
• Do not transfer balances: open-close-open-close

Please note that the FICO score only looks at information in your credit report. However, lenders look at many things 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.

Q. What information is not included in my credit score?
A. FICO scores do not consider the following information:

• US law prohibits credit scoring from considering your race, color, religion, national origin, sex and marital status, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
  
  
• Your age. Other types of scores may consider your age, but FICO scores don't.
  
  
• Your salary, occupation, title, employer, date employed or employment history. Lenders may consider this information, however, as may other types of scores.
  
  
• Where you live.
  
  
• Any interest rate being charged on a particular credit card or other account.
  
  
• Any items reported as child/family support obligations or rental agreements.
  
  
• The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
  
  
• Any information not found in your credit report.
  
  
• Any information that is not proven to be predictive of future credit performance.
  
  
• Whether or not you are participating in a credit counseling of any kind.

Q. How can I improve my credit score?
A. It's important to note that raising your score is a bit like losing weight: it takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.

Payment History Tips

• Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.
  
  
• If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
  
  
• Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
  
  
• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

• Keep balances low on credit cards and other “revolving credit”. High outstanding debt can affect a score.
  
  
• Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
  
  
• Don't close unused credit cards as a short-term strategy to raise your score.
  
  
• Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower score.

• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

• Do your rate shopping for a given loan within a focused period of time. FICO® scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
  
  
• Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term.
  
  
• Note that it's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

• Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix - it probably won't raise your score.
  
  
• Have credit cards - but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
  
  
• Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score.

Q. How is my credit history created?
A. Your credit report does not really exist until you or a lender asks for it. It is then compiled by the credit reporting agency based on the information stored in that agency's file. This information is supplied by lenders, by you and by court records. Your report details your credit history as it has been reported to the credit reporting agency by lenders who have extended credit to you. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit. It gives lenders a broader view of your credit history than do other data sources, such as a bank's own customer data.

Q. What's in my credit report?
A. Your credit report is made of four identifying categories, detailed below:

• Identifying Information
  Your name, address, Social Security number, date of birth and employment information are used to identify you. These factors are not used in scoring. Updates to this information come from information you supply to lenders.
  
  
• Trade Lines
  These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
  
  
• Inquiries
  When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.
  
  
• Public Record and Collection Items
  Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.

Q. How can I check for errors on my credit report?
A. You should make sure the information in your credit report is correct. Not only is your credit score based on this information, but lenders also review this information in making credit decisions. Review your credit report from each credit reporting agency at least once a year and especially before making a large purchase, like a house or car. To request a copy, contact the credit reporting agencies directly:

• Equifax: (800) 685-1111, www.equifax.com
  
  
• Experian (formerly TRW): (888) 397-3742, www.experian.com
  
  
• TransUnion: (800) 888-4213, www.transunion.com

If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report. Your lender will need to reorder your credit report and score once any changes have been made to your information at the credit reporting agency. Small errors may have little or no effect on your score. If there are significant errors, however, the lender may disregard the score.

Q. What are quick tips for improving my score?
A. If you need a loan, do your rate shopping within a focused period of time, such as 30 days. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

Generally, people with high FICO scores consistently:

• Pay bills on time.
  
  
• Keep balances low on credit cards and other revolving credit products.
  
  
• Apply for and open new credit accounts only as needed.

Also, here are some good credit management practices that can help to raise your FICO score over time.

• Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them on time will raise your FICO score over the long term.
  
  
• Check your own credit reports regularly, and before applying for new credit, to be sure they are accurate and up-to-date. As long as you order your credit reports directly from the credit bureaus or through an organization authorized to provide credit reports to consumers, your own inquiries will not affect your FICO score.

If you need to raise your credit score quickly, you may wish to contact a credit management company. Generally they can guarantee an increase of 100 points in 30 days. Check out the Mortgage Resources page of our website for a reputable credit management company.