credit scores work, how a score is calculated|
Buying a car? Most car dealers want to know your credit
score when you walk in the door, says Bob Kurilko, vice president
of product development and marketing for Edmunds.com, an online
consumer resource for automotive issues. "They want to know
how they can put a loan together for you."
The score has made it easier for many people to get
credit, Kurilko says.
Before, it was up to individual lending
institutions to come up with their own criteria, he says. "They would hedge
their risk and tend to go conservatively. It's opened up lending to a lot more
Until recently, many Americans didn't even know this number existed because it
was a closely guarded secret in the lending industry. In fact, lenders were prohibited
from telling borrowers their credit score. The line of reasoning: The number was
the result of analyzing complex financial data that the layperson would have difficulty
understanding. Plus, if people knew their score (according to the industry mindset
at the time), they might be able to change their behavior to manipulate the score
and throw off the whole model, rendering it useless.
changed a few years ago, when consumers began finding out about the score and
demanding to see it. In an unprecedented move in 2000, online lender E-Loan offered
to give consumers their scores for free, with information explaining how the score
is calculated and how they might improve it. Fair Isaac responded by cutting E-Loan
off from its source of credit reports, effectively crippling its ability to lend
money. E-Loan stopped giving away credit scores.
on the possibility of people being denied credit based on bad information in credit
reports led to several pieces of legislation -- and a much more open attitude
about credit scores.
Fast forward to current day: Not only can consumers
buy their score online from any number of sources, but everyone
is entitled to a free
copy of their credit report every 12 months from each of the
three major credit bureaus -- Equifax, Experian and TransUnion.
The program rolled out across the nation one geographical region
at a time with all consumers eligible on Sept. 1, 2005.
of your score
Just what goes into the score? Everything in your credit report,
with different kinds of information carrying differing weights,
says Fair Isaac Corp. Public Affairs Manager Craig Watts. The FICO-scoring
model looks at more than 20 factors in five categories. (The VantageScore
relies on slightly different factors. The Bankrate feature "New
Vantage credit score now online" compares the FICO score
with VantageScore. )
How you pay your bills (35 percent of the score)
The most important
factor is how you've paid your bills in the past, placing the most emphasis on
recent activity. Paying all your bills on time is good. Paying them late on a
consistent basis is bad. Having accounts that were sent to collections is worse.
Declaring bankruptcy is worst.
Amount of money you owe and the amount of available credit (30 percent)
The second most important area is your outstanding debt -- how much money you
owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered
is the total amount of credit you have available. If you have 10 credit cards
that each have $10,000 credit limits, that's $100,000 of available credit. Statistically,
people who have a lot of credit available tend to use it, which makes them a less
attractive credit risk.