The Components of Credit Scores

The Components of Credit Scores

• 1.
  The Components of CreditScores BY RICHARD THRIPP APRIL 27, 2016 PRESENTED IN FULFILLMENT OF: TOASTMASTERS ADVANCED COMMUNICATION SERIES TECHNICAL PRESENTATIONS PROJECT 1: THE TECHNICAL BRIEFING
• 2.
  What are CreditScores?
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  What are creditscores? • Scores based on your credit reports • Used when considering you for new credit cards, mortgages, and auto loans • A factor in decisions by some employers, landlords, banks, and auto insurance companies
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  Who maintains creditreports? • Three credit bureaus: • Equifax • Experian • TransUnion • Reports and FICO scores may differ between bureaus
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  What is aFICO score? • A credit scoring model developed in 1989 by Fair, Isaac, & Co. • Calculated from credit report(s) • Range: 300–850; 700+ is “good” • Typically cannot be obtained for free
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  Components of Credit Scores
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  Payment History 35% Utilization 30% Average Ageof Accounts 15% Mix of Credit Types 10% New Credit 10% COMPONENTS OF FICO CREDIT SCORES What does this mean? Most important: Payment History and Utilization—65% Don’t miss payments! Rule of thumb: use less than 30% of your available credit lines.
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  Payment History—35% • Includespersonal credit cards, mortgages, auto loans, and student loans • Excludes all other bills unless delinquent and referred to collections • Paying just the minimum payment on a credit card is exactly the same as paying in full for the purposes of this component • Being more than 90 days late is very bad
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  Utilization—30% • How muchof your credit lines are you using? • Lower utilization (below 30%) = better • Only relevant to credit cards • Usually based on statement balances • High impact and can change frequently • Looks at total credit usage and individual credit lines, to some extent
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  Average Age ofAccounts—15% • Includes your oldest account and the average (mean) age of all your accounts • Most relevant to credit cards • Older = better • Don’t cancel credit cards if no annual fee
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  Mix of CreditTypes—10% • Your credit score improves mildly if you have a mix of credit cards, mortgages, auto loans, and student loans • You can still have a great score (e.g., high 700s) with credit cards alone
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  New Credit—10% • “Hard”credit inquiries occur when you are applying for credit • Creditors might inquire at 1–3 bureau(s) • These inquiries mildly hurt your scores for about 6 months and disappear after 2 years • Avoid applying for credit cards for 6–12 months before getting/refinancing a mortgage
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  What’s missing fromFICO scores? • Job, income, employment history • Utility bills and rent payments • Assets and credit limits • However, credit limits and employment may be on your credit reports (based on your prior self-reports) and often factor into credit issuance decisions
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  Concluding Thoughts
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  FICO and “FAKO”scores • The FICO “classic” score was described here and is the most widely used score, but there are others such as FICO mortgage and auto scores, which are infrequently used • Credit Karma, Credit Sesame, and others usually provide “FAKO” scores which may not match your FICO scores
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  Building your creditbelvedere • A belvedere is an Italian term meaning “beautiful sight” and also can refer to an overlook point similar to a watchtower • Build your credit belvedere by being informed • Request your free credit report from www.AnnualCreditReport.com • Know your interest rates, terms, and balances Plan ahead