Credit Scoring

Credit scoring has been around for a number of years. Various creditors have had their own type of credit scoring models going back to at least the 1980s.

Today, while some lenders still maintain their own type of credit scoring models, most use the credit bureau scoring models which are called Fair, Isaac Credit Bureau Scores. Each of the three major credit bureaus use a FICO score based on the same base model with a different name used for each credit bureau. The FICO scores are based on the data contained in each of the separate credit bureaus so that it is quite possible, and quite likely, that you would have different FICO scores for each bureau.

• Equifax refers to their FICO score as a BEACON score
• Experian refers to their FICO score as the The Experian/Fair Isaac Model - most people, particularly within the lending community often relate the FICO score with the Experian credit report
  
• Trans Union refers to their FICO score as the EMPERICA score.

The credit scoring system is based on a statistical means of determining how likely it is that a borrower will pay back a loan. Lenders use this score to determine the level of risk involved in a lending decision. The FICO score does not take into account the income of the potential borrower, the assets, bank account information, again, it simply uses the information provided within the credit report to determine a score.  The score is a "snapshot" of the current credit report information at the time it is requested. In other words, the score is computed when the credit report is pulled it is not a "score" that sits on your report until something changes. It is not part of your credit report and you will not get a copy of the score when you get a copy of your credit report. 

• Tradelines
• Inquiries
• Collections
• Public Records
• Previous credit performance
• Current level of indebtedness
• Amount of time credit has been in use
• Pursuit of new credit
• Types of credit experience

A very high percentage of your score is based on the three items in bold. As a matter of fact, as much as 75% of your score is based on these factors. I have further defined those three items below.

• Previous credit performance - your credit history. This looks at your accounts and determines how those accounts are/were paid. See my article on credit disputes for more information.
• Current level of indebtedness - This looks at the average balance of your revolving trade lines, the ratio of revolving debt to your total revolving limits.
• Percentage outstanding on open installment loans.

I have decided not to go into very much detail as to what effects your score, I have simply tried to provide you with some useful information so that you know what basic factors determine your credit score.

will be adding a more detailed article at a later date and perhaps placing one in our newsletter if there is sufficient feedback to warrant such.