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The Scoring Rubric Explained

By Sally Maison
Published: Saturday, September 26th, 2009

Consumers should know how exactly their scores are determined so they can manage their debts better. Although the length of credit history is not within the control of consumers, they can manage other factors easily. Below is how Fair Isaac Company (FICO) computes the scores of consumers:

The Scoring Rubric Explained35% for payment history: This shows if the consumer has been prompt in paying his bills. If he does not pay his bills on time, how long before he does? How often does he pay late? These facts are part of a person’s payment history. If he pays late, but his payment does not exceed 30 days after the due date, he will only incur a late charge. Extra fees will be charged, but this will not affect his score. On the other hand, a delinquent payment which is 30 days late will hurt his rating in the credit reporting agencies (CRAs).

30% for debt to credit ratio, otherwise called the total amounts owed: This is how much debt a person has incurred in relation to his credit limit. A cardholder who has a limit of $50,000 and acquires $30,000 worth of debt has a ratio of 60%. During the past month, most cards issuers such as Chase have been reducing credit limits without prompt notice. If the creditor cuts the debt limit of that person to $40,000, his ration will rise to 70%. This will hurt his credit score badly and could be the reason for rejection of loan applications in the future.

15% for length of consumer history: Students and newly-weds can do little about his. However, cardholders who plan to close old credit cards are advised to refrain from doing so. It will shorten their history and will affect their ratings negatively. Experts advise consumers to use those old cards when buying small items and pay balances off promptly. It will have positive effects on their payment history.

10% for recent credit requests: This includes new inquires for home and auto loans as well as applications for credit cards, personal loans, and retail store accounts. However, FICO does not reduce the rating of consumers who shop for mortgage and auto loans with a period of 2 to 3 weeks.

10% for types of credit used: Consumers who use different kinds and manage them well are considered lesser risks. Hence, they are rated higher and enjoy lower interest rates. The types include installment (land and vacation loans), revolving (credit cards), and consumer finance (subprime lending). There are many other examples for each kind, but consumers just have to remember to manage their debts well.

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