Understanding Your Credit Score and How
You Can Improve It
How is your score calculated?
• The exact formula is a mystery and protected by the Federal Trade
Commission – Think of it as a secret recipe.
• Credit Score scales generally range from 300 to 850 or 350 to 950.
– The higher the score, the better the credit risk
– The lower the score, the worse the credit risk
Why is your Credit Score important?
• Understanding credit scoring can help you manage your credit.
• By knowing how credit risk is
evaluated, you can take actions
that will lower credit risk, and you
can raise your score over time.
How is your score calculated? (Cont.)
• Generally, a credit score of 719 is the
average score of approved home loans (on the 850 scale).
• The market is moving to where you want to shoot for a score of 750 or above (on a 850 scale).
Your Credit Report Shows…
• Debts and payment history with creditors:
– Loans with credit card companies, banks, department stores, and finance companies – Whether bills were paid on time and proper
amounts
– How much debt you currently have and if loans are not paid back
– History of tax liens, bankruptcies, and other public records – even if they happened
several years ago
• How often you have applied for credit in the past two years.
In the Secret Recipe…
• Payment History = Approximately 35% of the score:
– Includes information from public
records on bankruptcies, foreclosures, tax liens, etc.
– Number of months since most recent 30-day or higher level of delinquency reached.
– Highest level of delinquency reached in the last 12 months.
Past Payment History
HIGH
LOW
RISK
MONTHS SINCE MOST RECENT MAJOR DELINQUENCY
Recent Changes to the Model That May Affect Your Score
• One 30 day late payment hurts
your score less than in the past, but
…
• More than one late payment, or
even one late payment that rolls to
60 or more days will hurt your credit
score even more!
In the Secret Recipe…
• Outstanding Debt Utilization = 30% of your score:
– Average Balance on revolving accounts – Percentage owed on revolving accounts – Ratio of revolving debt to total revolving
limits
– Percentage owed on open installment loans Note: Rule of thumb has changed from 50%
triggering risk to anything over 30%!
Outstanding Debt Utilization
HIGH
LOW
RISK
RATIO OF TOTAL BALANCES TO TOTAL LIMITS ON REVOLVING ACCOUNTS
In the Secret Recipe…
• History & Length of Credit = 15% of your score:
– Number of months since the oldest active revolving account opened
– Number of months since the oldest installment account opened
– “Credit Surfing” can be a problem
The Amount of Time
Credit Has Been Established
HIGH
LOW
RISK
NUMBERS OF MONTHS SINCE OLDEST REVOLVING ACCOUNT OPENING
In the Secret Recipe…
• Type of Credit Being Used = 10% of your score:
– Number of bank cards being used
– Number of retail or department store cards being used
– Number of finance company accounts
What is a “Healthy Mix?”
• A mix of credit cards, retail accounts,
installment loans, and finance company accounts. It is not necessary to have
one of each, and it is not a good idea to open credit accounts just to have them in the mix.
• The credit mix usually will not be a key
factor in determining a score, but it will
be more important if a credit report does
not have a lot of other information.
In the Secret Recipe…
• New Credit Inquiries = 10% of your score:
– How many inquiries impact the score – Which inquiries impact the score
– Number of inquiries in the last 12 months
Top 10 Reasons for Low Credit Scores
1. Serious delinquency
2. Serious delinquency and public record or collection filed 3. Derogatory public record or collection file
4. Time since delinquency is too recent or unknown 5. Level of delinquency on accounts
6. Number of accounts with delinquency 7. Amount owed on accounts
8. Proportion of balances to credit limits on revolving account too high
9. Length of time accounts have been established 10. Too many accounts with balances
**Note that the specific wording given by lender may be different from these.
Credit Scoring Example
Characteristics Attributes Points
# bankcard accounts 0 1 2 3 4 5 or more
12 22 30 40 30 25
# finance accounts 0 1 2 3 4+
75 55 40 35 20
# months in file <12 12 – 23 24 – 47 48 +
12 35 60 65
Credit scoring is a technology used by credit
grantors to qualify the risk associated with extending credit
to a given consumer.
To have an established Credit Score…
• One account has to have been open for six months or more.
• Enough information and enough recent information in the report on which to base a score.
• Credit reporting agencies do not
score any “disputed” accounts.
Why you might not have a Credit Score?
• You may not have any established credit history.
• For example, you may not have the type of credit that is typically reported to the credit bureau:
– Contract for Deed – Rent
– Small banks that do not report to a credit bureau
What is your score used for?
• Approving New Accounts
– Application
– Instant Credit Approval
• Existing Account Management
– Increasing Lines
– Reissuing or Canceling Cards
Things that can hinder you from getting the best rate
Bad debt:
• Late payments
• 30 days – reported to credit bureau
• Large lines of credit
• Judgments and collections
• Too many cards
• Over your limit $ given
What is your score used for:
Year/
Model
Term FICO 745 +
FICO 744 - 720
FICO 719 - 690
FICO 689 - 670
FICO 669 - 640
2009/2008 Up to 48 5.79 6.09 6.24 7.44 7.64
49 - 60 5.84 6.19 6.34 7.64 7.94
61 – 66 5.94 6.24 6.44 7.94 8.14
67 - 72 5.99 6.29 6.64 8.14 8.39
Determining what RATE you pay
What is your score used for:
Tier Level Score Program Pricing New
Level 1 690+ Base Rate
Level 2 670 – 689 Base + .35%
Level 3 640 – 669 Base + 1.00%
Level 4 610 - 639 Base + 2.50%
Determining what RATE you pay
* Shown as an example only.
Home Loan Costs
≤60.00% 60.01-70.
00%
70.01-75.
00$
75.01-80.
00%
80.01-85.
00%
85.01-90.
00%
90.01-95.
00%
≥740 -0.250% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%
720-739 -0.250% 0.000% 0.000% 0.250 0.000% 0.000% 0.000%
700-719 -0.250% 0.500% 0.500% 0.750 0.500% 0.500% 0.500%
680-699 0.000% 0.500% 1.000% 1.500% 1.000% 0.750% 0.750%
660-679 0.000% 1.000% 2.000% 2.500% 2.250% 1.750% 1.750%
640-659 0.500% 1.250% 2.500% 3.000% 2.750% 2.250% 2.250%
620-639 0.500% 1.500% 3.000% 3.000% 3.000% 2.750% 2.750%
‹620 0.500% 1.500% 3.000% 3.000% 3.000% 3.000% 3.000%
Representative Credit Score
How do people score?
Above 780 – 20%
745 to 780 – 20%
690 to 745 – 20%
620 to 690 – 20%
Below 620 – 20%
Your Credit Score is part of your Credit Report
• Your are entitled to 1 free credit
report each year from each credit reporting agency…
• However, there is generally an extra
charge for your credit score…($5.95
to $6.95)
How do I get my Free Credit Report?
• Go to…
– www.annualcreditreport.com