Credit Scoring Systems

Understanding Credit Scoring.. How's your FICO?

In today's increasingly automated society, your ability to pay can be reduced to a single number. All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, with the results summarized into a single numeric indicator of whether you're likely to meet your future obligations.

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different credit scoring system, the best known being the FICO score. This system is based on a model developed by (and named for) Fair Isaac and Company and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA.

While each credit scoring model varies, they all consider a range of data available in your credit report. Primary factors include:

• Credit History How long have you had credit?
• Payment History Do you pay your bills on time?
• Credit Card Balances How much do you owe on how many accounts?
• Credit Inquiries How many times have you had your credit checked?

How Do You Rate? What Does It Mean?

Each of these credit scoring factors, and other items, are assigned a value and are weighted based on their importance. The results are added up and distilled into a single number. FICO scores range from 300 to 800, with higher being better.

Qualifying For More Than Just the Purchase..

Typical home buyers likely find their FICO scores falling between 600 and 800. FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

What can you do about your FICO score?

Unfortunately, not much. Since the score is based on a lifetime of credit history, it is difficult to make a significant change in the number with quick fixes. The most important thing is to know your FICO score and to ensure that your credit history is correct.

Know Your Score

Conveniently, Fair Isaac has created a web site (www.myFICO.com) that, for a reasonable fee, will quickly let you get your FICO score from all three reporting agencies, along with your credit report. Also available is some helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.