Credit Scoring 101

Posted on: September 20, 2007

Credit scores (often referred to as FICO scores) are used by lenders and others to assess the credit risk of borrowers or existing customers to help them make credit and marketing decisions. These scores are derived solely from the information available on credit bureau reports. You have three FICO scores, one for each of the three credit bureaus–-Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well.

FICO scores provide the best guide to future risk based solely on credit report data.

But no particular score determines whether a specific individual will be a “good” or “bad” customer. And while lenders will use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product.

There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine an interest rate.

What’s In Your Score? The following percentages reflect how important each of the categories is in determining your score.

35%	Payment History
30%	Amounts Owed
15%	Length of credit history
10%	New Credit
10%	Types of credit used

The higher the score, the lower the risk. According to Experian, the average credit score on a national basis is 678. I found this chart on My FICO.com.

Do you know what’s on your credit report? The Fair Credit Reporting Act requires each of the nationwide consumer reporting companies to provide you with a FREE copy of your credit report, upon your request, once every 12 months. Your free report, however, typically does not reflect your credit score.

Article written by Jo Rice, broker for PortlandRealEstate.com.