A BRIEF PRIMER ON CREDIT SCORES
How Credit Scores Affect You
A credit score is critical when it comes to borrowing money from banks, applying for a loan, credit
card, any type of consumer debt, rental application and most important mortgages. It is also a vital
tool considered by a creditor or lender on whether or not to extend credit. The importance of
maintaining an excellent credit score cannot be understated. Your credit score follows you
everywhere you go. It is based on information based from your credit report. Bad credit equates to
bad credit score. This means not paying your bills on time, collection notices, past due notices, etc.
Generally, all your credit history information, remains on your credit report for seven years. If you file
for personal bankruptcy, that remains on your credit report for 10 years. Bad credit scores ultimately
equates to no credit extended or least favorable credit terms (such as paying a high interest rate) You
need to understand what a credit score is; what factors influence an individual’s credit score and how
to improve your credit score.
What Information is Contained in my Credit Report
There are usually four (4) types of information included in your credit report, namely:
1. Identifying Information Your full name, any known aliases, current and previous addresses,
social security number, year of birth, current and past employers, and, if applicable, information about
your spouse.
2. Credit Information The accounts you have established with banks, credit-card issuers, utility
companies, and other lenders (accounts are listed by type of loan, such as mortgage, student loan,
revolving credit, or installment loan; the date you opened the account; your credit limit and/or the loan
amount; any co-signers or co-borrowers of the loan; and your payment pattern over the past two
years).
3. Public Record Information State and county court records on bankruptcy, tax liens, or monetary
judgments (some consumer reporting agencies list non-monetary judgments as well).
4. Recent Inquiries The names of those who have obtained copies of your credit report within the
past year (two years for employment purposes)
What is Credit Scoring
A credit scoring is a proprietary tool widely used by most creditors and lenders to determine
statistically how likely you would be able to pay back the money lent to you. In a nutshell, it is a
synopsis of your overall credit risk. The higher your score is, the likelihood you are able to repay your
debts promptly, and the likelihood that you are also able to receive a more favorable credit terms.
How Does Credit Scoring Work
Fair Isaac & Co. (FICO) is the company the started the credit scoring model. FICO develops scores
based solely on information contained in credit reports. It analyzes and compares information
contained in a consumer credit report against the patterns of information from thousands and
millions of other credit reports and calculates a score that statistically predicts the future credit risk for
a particular individual. It is a proprietary tool widely used by creditors or lenders.
There are other companies that develop statistical credit scoring models that are utilized. Widely
used is the FICO score. You’ll note that not all one FICO score from each of the three major credit
reporting agencies are the same. How these three major credit reporting agencies collect and report
information varies; since credit scores from each reporting agency only uses the information
contained in that agency’s report, so it is always possible to have three different scores. Depending
on the lender, all the three credit scores may be factored to get the average or by the taking the
highest and lowest and using the median as the credit scoring indicator. Three major reporting credit
bureaus includes Experian, TransUnion and Equifax.
What Factors Influence the Credit Score
A credit score takes into consideration all factors; no single piece of information or one factor will
determine the overall score, although some factors are heavily weighted than others. The five factors
that may influence your credit score are as follows:
• Payment History – 35%. This factor looks at how your pay your bill. Late payments, how late are
they? How often do you pay late? How recent are your late payments? How many accounts show no
late payments? Have you had accounts turned over to collection or a judgment entered against you?
Have you filed for Bankruptcy?
• Amount Owed. - 30% This factor looks at the total amount you owe, and on what types of
accounts. How many accounts have balances? How much of the total credit line is owed? How much
is owed now in relation to how much you borrowed originally (i.e. car loans)?
• Length of Credit History – 15% This factor looks at how long you’ve had certain credit accounts,
and how long it’s been since you used certain accounts.
• New Credit – 10% This factor looks at how many new accounts you have, how long it’s been
since you opened them, how many recent requests for credit you have made, and the length of time
since credit report inquiries were made by potential creditors/lenders. Shopping around for rates may
not affect this factor because the inquiries will be made for a particular type of credit during a short
period of time. (i.e. mortgage application)
• Balancing the Total Mix - 10% Your score is based on the total mix that considers everything
from your credit report that may include income, the length of employment, the number of years in
your current residence The more balanced your credit is, the more likely this factor is to improve your
overall score. Consider looking at your total debt to income ratio. The lower the ratio, the better it is.
Checking Your Credit Score
A credit score can be ordered for a fee, through any of the three major credit reporting agencies,
Experian, Equifax, Transunion, or through MyFico.com,and other companies. It is always important
to check your score before contemplating a major purchase in order to give you time to improve your
score, if appropriate
What do the Scores Mean (Based on Mortgage Industry Standards)
Credit Scores 720 and above. The risk of default is statistically very low for applicants with credit
scores in this range. Scores in this range are considered to represent excellent credit histories.
Credit Scores between 660 and 719. The risk of default is low for applicants who have credit scores
in this range. Applicants with scores in this range are considered to have good credit histories that
represent an acceptable level of risk to lenders and secondary markets.
Credit Scores between 620 and 659. From a statistical perspective, applicants who have credit
scores in this range begin to represent a higher degree of default risk.
Credit Scores Below 620. The risk of default is statistically very high for applicants who have credit
scores in this range.
Improving Your Credit Score
Over a short term or over a period of time, you can do the following ( DO’s and DON’T’s) to improve
your credit score:
• Always pay your bills on time. Don’t be late!
• Reduce your debt. Pay extra each month in order to pay off early!
• Pay balances in full if you can and avoid paying high interest on your credit cards
• Always check your credit report and immediately correct discrepancies (FREE Credit Report)
• Limit the frequency of applying for new credit and don’t over charge your accounts
• Maintain old/recent accounts – don’t close all old/recent accounts. – it could shorten the length
of your reported credit history.
• Recognize the fact that if your credit is overextended, immediately contact your creditors to see if
they would be willing to set up a new payment schedule that you can maintain. Don't just ignore your
bills!
• Take control and remove credit cards from your wallet. Keep them from reach or cut it in half.
• Consider consolidating debts. You may find it easier to make a single payment rather than
several. You might also get a lower interest rate that will make it easier to keep up with payments.
Remember that debt consolidation is not a quick fix. You have to learn to control your spending habits
to avoid future debt.
• Contact a credit counseling organization. You can obtain referrals for organizations in your area
through the National Foundation for Consumer Credit, (800) 388-2227.
• Opt out on obtaining new credit. Register online to discontinue receiving new credit offers.
• If it’s too good to be true. It probably isn’t true at all! Be wary of companies that promise to fix a
poor credit rating quickly and painlessly for a fee. As long as it is accurate and timely, negative
information cannot be removed from your credit record. The only way to improve a credit record is to
let time pass and establish a record of on-time payment.
Bottom Line
Remember your credit score is simply a “snapshot” of your credit risk at a particular point in time. It
changes as new information is added to your bank and the credit bureau files. Your credit scores
change gradually as you change the way you handle your credit over a time of time. It’s not to late to
take financial control now!
© 2006 Gold Fortune Realty
How Credit Scores Affect You
A credit score is critical when it comes to borrowing money from banks, applying for a loan, credit
card, any type of consumer debt, rental application and most important mortgages. It is also a vital
tool considered by a creditor or lender on whether or not to extend credit. The importance of
maintaining an excellent credit score cannot be understated. Your credit score follows you
everywhere you go. It is based on information based from your credit report. Bad credit equates to
bad credit score. This means not paying your bills on time, collection notices, past due notices, etc.
Generally, all your credit history information, remains on your credit report for seven years. If you file
for personal bankruptcy, that remains on your credit report for 10 years. Bad credit scores ultimately
equates to no credit extended or least favorable credit terms (such as paying a high interest rate) You
need to understand what a credit score is; what factors influence an individual’s credit score and how
to improve your credit score.
What Information is Contained in my Credit Report
There are usually four (4) types of information included in your credit report, namely:
1. Identifying Information Your full name, any known aliases, current and previous addresses,
social security number, year of birth, current and past employers, and, if applicable, information about
your spouse.
2. Credit Information The accounts you have established with banks, credit-card issuers, utility
companies, and other lenders (accounts are listed by type of loan, such as mortgage, student loan,
revolving credit, or installment loan; the date you opened the account; your credit limit and/or the loan
amount; any co-signers or co-borrowers of the loan; and your payment pattern over the past two
years).
3. Public Record Information State and county court records on bankruptcy, tax liens, or monetary
judgments (some consumer reporting agencies list non-monetary judgments as well).
4. Recent Inquiries The names of those who have obtained copies of your credit report within the
past year (two years for employment purposes)
What is Credit Scoring
A credit scoring is a proprietary tool widely used by most creditors and lenders to determine
statistically how likely you would be able to pay back the money lent to you. In a nutshell, it is a
synopsis of your overall credit risk. The higher your score is, the likelihood you are able to repay your
debts promptly, and the likelihood that you are also able to receive a more favorable credit terms.
How Does Credit Scoring Work
Fair Isaac & Co. (FICO) is the company the started the credit scoring model. FICO develops scores
based solely on information contained in credit reports. It analyzes and compares information
contained in a consumer credit report against the patterns of information from thousands and
millions of other credit reports and calculates a score that statistically predicts the future credit risk for
a particular individual. It is a proprietary tool widely used by creditors or lenders.
There are other companies that develop statistical credit scoring models that are utilized. Widely
used is the FICO score. You’ll note that not all one FICO score from each of the three major credit
reporting agencies are the same. How these three major credit reporting agencies collect and report
information varies; since credit scores from each reporting agency only uses the information
contained in that agency’s report, so it is always possible to have three different scores. Depending
on the lender, all the three credit scores may be factored to get the average or by the taking the
highest and lowest and using the median as the credit scoring indicator. Three major reporting credit
bureaus includes Experian, TransUnion and Equifax.
What Factors Influence the Credit Score
A credit score takes into consideration all factors; no single piece of information or one factor will
determine the overall score, although some factors are heavily weighted than others. The five factors
that may influence your credit score are as follows:
• Payment History – 35%. This factor looks at how your pay your bill. Late payments, how late are
they? How often do you pay late? How recent are your late payments? How many accounts show no
late payments? Have you had accounts turned over to collection or a judgment entered against you?
Have you filed for Bankruptcy?
• Amount Owed. - 30% This factor looks at the total amount you owe, and on what types of
accounts. How many accounts have balances? How much of the total credit line is owed? How much
is owed now in relation to how much you borrowed originally (i.e. car loans)?
• Length of Credit History – 15% This factor looks at how long you’ve had certain credit accounts,
and how long it’s been since you used certain accounts.
• New Credit – 10% This factor looks at how many new accounts you have, how long it’s been
since you opened them, how many recent requests for credit you have made, and the length of time
since credit report inquiries were made by potential creditors/lenders. Shopping around for rates may
not affect this factor because the inquiries will be made for a particular type of credit during a short
period of time. (i.e. mortgage application)
• Balancing the Total Mix - 10% Your score is based on the total mix that considers everything
from your credit report that may include income, the length of employment, the number of years in
your current residence The more balanced your credit is, the more likely this factor is to improve your
overall score. Consider looking at your total debt to income ratio. The lower the ratio, the better it is.
Checking Your Credit Score
A credit score can be ordered for a fee, through any of the three major credit reporting agencies,
Experian, Equifax, Transunion, or through MyFico.com,and other companies. It is always important
to check your score before contemplating a major purchase in order to give you time to improve your
score, if appropriate
What do the Scores Mean (Based on Mortgage Industry Standards)
Credit Scores 720 and above. The risk of default is statistically very low for applicants with credit
scores in this range. Scores in this range are considered to represent excellent credit histories.
Credit Scores between 660 and 719. The risk of default is low for applicants who have credit scores
in this range. Applicants with scores in this range are considered to have good credit histories that
represent an acceptable level of risk to lenders and secondary markets.
Credit Scores between 620 and 659. From a statistical perspective, applicants who have credit
scores in this range begin to represent a higher degree of default risk.
Credit Scores Below 620. The risk of default is statistically very high for applicants who have credit
scores in this range.
Improving Your Credit Score
Over a short term or over a period of time, you can do the following ( DO’s and DON’T’s) to improve
your credit score:
• Always pay your bills on time. Don’t be late!
• Reduce your debt. Pay extra each month in order to pay off early!
• Pay balances in full if you can and avoid paying high interest on your credit cards
• Always check your credit report and immediately correct discrepancies (FREE Credit Report)
• Limit the frequency of applying for new credit and don’t over charge your accounts
• Maintain old/recent accounts – don’t close all old/recent accounts. – it could shorten the length
of your reported credit history.
• Recognize the fact that if your credit is overextended, immediately contact your creditors to see if
they would be willing to set up a new payment schedule that you can maintain. Don't just ignore your
bills!
• Take control and remove credit cards from your wallet. Keep them from reach or cut it in half.
• Consider consolidating debts. You may find it easier to make a single payment rather than
several. You might also get a lower interest rate that will make it easier to keep up with payments.
Remember that debt consolidation is not a quick fix. You have to learn to control your spending habits
to avoid future debt.
• Contact a credit counseling organization. You can obtain referrals for organizations in your area
through the National Foundation for Consumer Credit, (800) 388-2227.
• Opt out on obtaining new credit. Register online to discontinue receiving new credit offers.
• If it’s too good to be true. It probably isn’t true at all! Be wary of companies that promise to fix a
poor credit rating quickly and painlessly for a fee. As long as it is accurate and timely, negative
information cannot be removed from your credit record. The only way to improve a credit record is to
let time pass and establish a record of on-time payment.
Bottom Line
Remember your credit score is simply a “snapshot” of your credit risk at a particular point in time. It
changes as new information is added to your bank and the credit bureau files. Your credit scores
change gradually as you change the way you handle your credit over a time of time. It’s not to late to
take financial control now!
© 2006 Gold Fortune Realty
GOLD FORTUNE REALTY
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CONTACT US NOW
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We are totally focused on
our client's needs, and we
work hard to realize their
dreams as if they were
our own.
GOLD FORTUNE REALTY
our client's needs, and we
work hard to realize their
dreams as if they were
our own.
GOLD FORTUNE REALTY
