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Credit Score Ranking: What You Should Know

Credit Score RankingA consumer who has a FICO score of 600 will pay about $300 more a month on a $150,000 mortgage than a person who scored 800. That's $108,000 more in interest over the life of a 30-year fixed-rate mortgage, according to MyFico.com calculator.

In June of 2000, Congress passed a law forcing FICO to release the list of criteria used to arrive at a credit score. The following is a general guideline for the FICO scoring system. Unfortunately, FICO uses at least ten different models to calculate the likelihood of a consumer paying back a debt.

Bill Payment History

35% of your score is based on your bill payment history. Late payments or those turned over to collection agencies, as well as a bankruptcy, can seriously lower your credit score. But timely payments of credit cards, utility bills, retail accounts, installment loans and mortgage will go a long way at boosting your FICO score.

Tip: Make sure that your good credit history is showing up on all three of your reports. Sometimes creditors will only report to one of the three agencies. This can lower your overall credit score, especially with creditors who only pull reports from one or two bureaus to make their credit decisions.

Lynnette Khalfani, author of Zero Debt: The Ultimate Guide to Financial Freedom, states, "Ask your lender to report it, or you can write to the credit bureau directly. 'I have this account. Please add this to my credit file'."

Account Balances

Another 30% of your credit score is based on how much outstanding debt you owe. For the FICO models, outstanding debt is the amount of your credit limits in comparison to the amount of your outstanding balances. The closer together the two are, the more likely your credit score will be lowered.

These balances include revolving credit like Visa and MasterCard but also other installment loans such as home equity lines of credit. One consumer raised his credit score by 60 points paying down his home equity loan.

Experts recommend keeping no more than three or four open lines of credit with balances of no more than 30% of their actual limit.

Tip: Check that all credit card lenders are reporting your limits to the credit reporting agencies. Some creditors purposely hurt their customer's credit ratings by either withholding limits, or reporting them as the same amount as the current balance. This makes their customers look less appealing to other credit card companies thus protecting their customer base. Unfortunately, the resulting lower scores do more than deter other credit card companies. Many financial services can require higher interests rates due to this false information.

If this is happening to you, call the credit card customer service department to complain about these unfair practices.

Length of Credit History

15% of a FICO credit score is based on your past credit performance. For this reason, borrowers with too little or no credit history are considered as much a risk to creditors as those with poor credit.
Old debt doesn't hurt your credit score as much as new debt. This is good news for those of us who have been working to overcome past financial challenges. Remember that negative credit is only allowed by law to remain on your credit history for up to seven years. Therefore, the longer time has passed with no negative reports to your credit, the better.

Once you have paid down old credit card accounts, you may find it beneficial to leave them open. The zero balance can help lower your overall debt-to-limit ratio, as well as raising the average account age of your other loans.

Tip: Children going out on their own often find it difficult to establish credit. Revolving credit cards and auto loans with the best rates require some positive past credit. Parents can help their children establish credit before leaving home by co-signing on low balance car loans, or adding their names to a low balance credit or gas card. This is also a great way to teach responsible credit management.

Types of Credit and New Credit Applications

10% of your score is based on the type of credit you carry. Mortgages and auto loans look good and can raise your score, while credit card and other debt with high interest rates aren't so attractive. Another 10% is based on whether or not you have been looking to take on more debt. Each time a potential creditor pulls a credit report, the credit bureau keeps track. These inquiries are listed on your credit report and kept for two years. Too many inquiries may lower you credit score.

Tip: Not all credit inquiries are bad. Promotional or account-review inquiries, made by companies who may offer you credit, insurance or are evaluating your current credit status, are not listed. These institutions aren't given a full credit report and their inquiries do not affect your credit score. Be careful about applying for department store cards or other loans just to get the discount or promotional gift.

Improving a poor credit score is based on the same principle as keeping a credit score high. Responsible financial management, prompt loan payments, low credit balances and moderate debt will go a long way to keeping your FICO score healthy.

4 comments:

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