Credit Report Blog
Website CertifiedPrivacy Protected

Understanding the Credit Scoring System

By Ruth Racey
Published: Friday, September 4th, 2009

Financial experts recommend building an early credit history. Some people apply for multiple credit cards thinking that having several accounts in their name would make a good impression. However, lenders do not judge an individual’s credit worthiness based on the number of accounts he/she was able to open. A potential lender will most likely approve or deny your application based on your final credit score.

The three major credit bureaus use the FICO scoring system – a model created by the Fair Isaac and Company, in calculating credit scores. Base on this system, there are five factors that will determine a person’s credit rating. These are payment history, the amount of debt, the length of credit history, new accounts opened and the types of accounts opened.

Payment history makes up 35% of the total FICO score. This is the largest percentage among the five factors so it’s easy to see why late payments can dramatically pull down your score. The total amount of debt you owe from all your existing accounts makes up 30% of your total score. Ideally, it’s best to keep a balance between your income-to-debt ratio.

The next most important factor which makes up 15% of your score is the length of your credit history or how long you’ve been managing credit. Credit or new accounts that you opened recently takes 10% and the variation of the accounts you opened makes up the remaining 10% of the FICO score. It is a good idea to have a combination of accounts in your name such as mortgage, car loan, personal loan, and credit cards instead of just purely credit card accounts.

The FICO scores range from 300-850, depending on your ratings from each of the five factors we’ve mentioned above. A score 650 is considered as a “fair” or an “average” score while a score of 600 and below is considered to be “poor”. To enjoy an excellent credit standing, you need to keep your score at 750 or higher. Obviously, lenders prefer clients with the highest credit rating over those with lower scores.

It is also interesting to note that three major credit reporting agencies – Equifax, Experian and TransUnion- work separately. Thus, the credit report issued by Equifax may appear to be different from the report you get from Experian or TransUnion. This is why it’s best to obtain a copy of your report from all the three bureaus when inquiring about your personal credit rating.

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment

*