Financial Aid
What Goes Into a Credit Score?*
We all know that credit scores are used as the basis for approval or denial when we apply for loans, credit cards or mortgages. You may have even seen a recent copy of your credit report from one of the three major credit reporting bureaus—TransUnion, Equifax and Experian—thanks to the free, once-a-year report that each company provides via www.annualcreditreport.com.
Developed by the Fair Isaac Corporation, FICO®, or credit, scores don't show up on basic credit reports. Your credit score, which can be anywhere from 300 to 850, encapsulates your creditworthiness. Higher scores indicate a lower risk of default—and result in lower interest rates, cheaper insurance premiums, better deals on cell phones and lower utility deposits, to name just a few of the ways credit scores are used.
A January article in the New York Times gave the rundown of how your score is calculated:
- 35 percent: Payment history
- 30 percent: Amount you owe vs. available credit
- 15 percent: Length of credit history
- 10 percent: Accounts recently opened and recent credit inquiries initiated by the consumer
- 10 percent: Types of credit used (credit cards, mortgage, auto loan, etc.)
Not only has the subprime meltdown made almost all credit harder to come by, but Fair Isaac implemented changes to the latest iteration of the score, dubbed FICO 08. As a result, some behaviors that may not have hurt your score much in the past could cause your number to plunge, while other actions could help you boost your score more than in the past.
For example:
- Applying for new credit accounts may hurt less
- Having high balances on your credit cards could hurt more
- Actively using the credit accounts you have may be more important
- Having both revolving and installment accounts on your report could help you more, as the new formula is more sensitive to your ability to handle different types of credit.
Fair Isaac says most consumers will see a slight increase in their FICO 08 scores; some will see a drop.
You can order your credit score from the major credit reporting bureaus or directly from FICO; various packages are offered, starting at about $16. Or, if you don't need an exact score, you can try the FICO credit score estimator located at: www.myfico.com/FICOCreditScoreEstimator/Default.aspx.
*Resource EdFund Newsource Spring 2009
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