You pay your bills on time every month, and believe your credit score is high enough to get you great rates. But you may be surprised to learn otherwise. What do you need to know about the FICO score models to keep your credit score at its peak?
There are five scoring categories the FICO score models use to determine your score, and each category is assigned a different weight in the calculation. The categories are:
1. Payment history: 35% weight
2. Amounts owed on accounts: 30% weight
3. Length of credit history: 15% weight
4. New credit inquiries: 10% weight
5. Types of credit used: 10% weight
Within each category, the scoring software looks at several specific areas. These are called "scoring factors" or "reason codes" and a typical mortgage credit report lists four of them, in priority order, for the score shown on your report. Knowing what the scoring factors are, and paying attention to the four that apply most to your situation will guide you to improve your FICO score. At the end of this article we'll list the factors for each category.
The three national credit bureaus-Equifax, Trans union & Experian-will usually report a slightly different score for you, even though they all use scoring software from Fair, Isaac & Company (FICO). The reason is that your credit information has slight differences between the bureaus is that each creditor doesn't necessarily report to all three. What's important here is that factors on each bureau's report will create a score from the information specific to each bureau.
According to Ginny Ferguson, Credit Scoring Committee Chair for the NAMB (National Association of Mortgage Brokers), the top 10 most commonly activated scoring factors are those listed below. If you look at your credit report with the goal of avoiding these factors, you will promote a positive score:
1. Serious delinquency-30, 60 or 90 days late or more.
2. Serious delinquency and public record or collection filed-bankruptcy, lien, judgment, etc.
3. Derogatory public record or collection filed.
4. Time since delinquency is too recent or unknown-anything in the past 12 months will hit hard.
5. Level of delinquency on accounts-60 days late is much harder on the score than 30 days.
6. Number of accounts with delinquency.
7. Amount owed on accounts-3 credit cards maxed out is worse than 1 maxed out and two below 50%.
8. Proportion of balances to credit limits on revolving accounts is too high-over 50% balance owing on any accounts causes a score hit.
9. Length of time accounts have been established-the longer the better.
10. Too many accounts with balances-too much credit.
How many points?
FICO scores consider so many data points and "if-then" relationships that it's impossible to say that a certain behavior will raise or lower a score by a fixed number of points. No one piece of information or factor alone determines a given point hit, because the relative weight of any factor in a scoring category depends on the overall information in the credit report. Remember also that scores change over time, and 12 months of positive actions can significantly raise your FICO score, while a month or two of negative actions can significantly lower it.
That said, there have been cases where a single late payment dropped a score 10-50 points, even with an otherwise perfect payment history. Applying for new credit, regardless of whether the application is accepted, often causes a 1-2 point drop in the score, so avoid opening new accounts just for the discount some stores or credit card companies offer. In addition, having a new account tends to drop your score for the first 12-13 months, beyond the drop for the application process (which results in another credit inquiry). And one behavior that may be easily managed if you know about it is keeping your account balances below 50%. Having one or more revolving accounts carrying a balance over 50% of the credit limit can cause a sharp drop in the FICO score.
For better precision in calculating improvements or detriments to your score, you can use one of the score simulators available online today. The simulators, available for an extra cost when you purchase an online credit report from Myfico, Equifax and companies affiliated with Creditxpert allow you to test different actions to see the resulting effects on your score. If you are not clear about how certain items are playing into your FICO score, these products are well worth the small price.
Specific scoring factors
According to Fair Isaac at Myfico, the following scoring factors are found in each of the five scoring categories:
• 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
• Time since (recency 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
• Amount owing on accounts
• Amount owing on specific types of accounts (revolving, installment, etc.)
• Lack of a specific 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 inquiries
• 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
• What kinds of credit accounts the consumer has
• How many of each type of account
You can't directly control your FICO score, but you can manage the behaviors that affect your score when you know more about how scores work. Put FICO score information into your everyday financial knowledge base and reap the rewards in lower interest rates.