| How
credit scores work, how a score is calculated | | |
| "Carrying a lot of debt doesn't
necessarily mean you'll have a lower score," Watts says. "It doesn't
hurt as much as carrying close to the maximum. People who consistently max out
their balances are perceived as riskier. People who never use their credit don't
have a track history. People with the highest scores use credit sparingly and
keep their balances low." 3. Length of credit history
(15 percent)
The third factor is the length of your credit history. The longer
you've had credit -- particularly if it's with the same credit issuers -- the
more points you get. 4. Mix of credit
(10 percent)
The best scores will have a mix of both revolving credit, such
as credit cards, and installment credit, such as mortgages and car loans. "Statistically,
consumers with a richer variety of experiences are better credit risks,"
Watts says. "They know how to handle money." 5.
New credit applications (10 percent)
The final category is your interest
in new credit -- how many credit applications you're filling out. The model compensates
for people who are rate shopping for the best mortgage or car loan rates. The
only time shopping really hurts your score, Watts says, is when you have previous
recent credit stumbles, such as late payments or bills sent to collections. "Then,
looking for new credit will be seen as an alarm because statistically, before
people declare bankruptcy and default on everything, they look for a life preserver,"
Watts says. Also, if you have a very young credit file, an inquiry can count for
more than if you've had credit for a long time. What
doesn't count in a score
The scoring model doesn't look at:
- age
- race
- sex
- job or length of employment at your job
- income
- education
- marital status
- whether you've been turned down for credit
- length of time at your current address
- whether you own a home or rent
- information not contained in your credit report
A lender may consider all those factors when deciding
whether to approve a loan application, but they aren't part of how a FICO score
is calculated, Watts says. Credit scores
are not perfect
The major drawback to credit scoring is that it relies
on information in your credit report, which is quite likely to contain errors.
That's why it's critical that you check your credit reports annually, or at the
very least three to six months before planning to buy a house or a car. That will
give you sufficient time to correct any errors before a lender pulls your score. Watts
says that the need for accuracy in credit files is one reason why it's good for
consumers to learn about credit scores. "There's a hope
that as consumers know about credit reports and scores, they'll do more to correct
errors and provide more oversight," he says. "If consumers can police
the accuracy of their own reports, everybody gains."
Want to get an approximation of your score? Bankrate
and FICO have teamed up to create the free FICO
Score Estimator.
Bankrate editorial assistant Leslie
Hunt contributed to this story.
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