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Information about credit scores & tips on how to improve your credit score

Who Started the Credit Score?
Fair Isaac and Company is a California based company founded in 1956 by Bill Fair and Earl Isaac.  They started the field of credit scoring for financial institutions.  They have grown to cover decision systems analysts and consulting.  All credit agencies and most lenders figure your credit score using software from Fair Isaac and Company.  The end result is a Fico Score also known as a Beacon Score.

What is a Fico or Beacon Score?
The credit score represents the risk a lender may have in extending you credit.  There are several parameters in your credit score, including length of credit history, number of open accounts, loans, mortgages, public records and others, and they are formulated to make up a score between about 300 and 950.  Usually a lending institution will use your credit score with other factors when determining your risk factor.

How Do They Calculate a Credit Score? 
Different credit bureaus calculate your Fico or Beacon Score slightly different.  Each credit bureau makes the score their own and gives it a different name.  Equifax calls the score a Beacon Score, Experian calls it a Fair Isaac Score and Transunion calls it an Empirica Score.  Every time something changes on your bureau, your score will change.  A lot of information is used to calculate your score; however, there is no formula that has ever been given to the public.  Lenders will look at your score along with your income and the kind of loan you are applying for to determine interest rates.  

What Factors Affect Your Credit Score?
There are five factors used in calculating your overall credit score.

FACTOR #1. Payment History is 35% of your score
Payment history is determined by if you pay your accounts on time.   
Payment history includes any loan that you have had to make monthly payments on.  For example, auto loans, mortgages, credit cards, department stores and finance companies.  
If you are late on an account it can eventually turn into a collection account or public record.  These may include bankruptcies, lawsuits, liens, collections, wage attachments and judgments.  These are very serious accounts and hurt your score dramatically.
Security- How delinquent is the payment?  Have you been 30, 60, 90 or 120 days late? Is it still outstanding?  Paying on time will raise your Beacon or Fico Score greatly.
Recent history- How long ago where you delinquent?  Are you still delinquent?  Current late payments can hurt your score by up to 100 points. Prevalence- How many obligations do you have?  What percentages of your accounts are late now?

FACTOR #2. How Much You Owe is 30% of your score
Does your income allow you to make your payments and pay your home bills on time and still have money to spend on every day activities?  
What type of account is it?  Different kinds of credit accounts are figured differently.  Credit cards are different than home loans in factoring your score or determining if you apply for a loan. 
It is important to look at how much you owe total.  A lot of accounts with small balances may hurt you because you could run up those balances at anytime.  If you have not used a card in many years, it is good to close it.  Paying off your credit cards every month is good.  Try to keep the amount of credit cards you keep down to a minimum.  Three or four open credit cards are a good amount to have.
If you have high balances on your credit cards and are close to your limit, it is affecting your score, even if you have made your payments on time.  Lenders do not want to see high balances because it shows that you may not have the money to pay anymore than the minimum payment.

FACTOR #3. Amount of Time Credit Has Been In Use is 15% of your score
The longer you have had credit, the better the score as long as the credit you have has been in good standings.  This means that older people that have always had good credit will probably have higher scores than someone who is younger with good credit, but young people can still have a good credit score.
It is important to look at how long have you had an account and how long has been in the credit report.  The average age of your accounts are taken into considerations when calculating your score.  You must also use the accounts that you have.  If it has been many years since you have used an account, it may not hold much of a score.  Using the accounts you have will help your score. 

FACTOR #4. Inquiries are 10% of your score
It is easier to obtain credit these days via mail, internet and many other ways.  Every time you give someone permission to run your credit and you get an inquiry, it can lower your credit score.  Mortgage and auto loans are treated differently for example auto loans made within 14 days are counted as one
There are no good inquiries.  Every time you fill out a credit application, you get one or more inquiries.  Too many inquiries look bad.  Even though there are no good inquiries, there are neutral ones that don’t hurt your score.
Pre-approval inquiries are when a potential lender has looked at your credit to determine whether they want to offer you a loan.  These are not factored in to your score, but once you fill out an application with the lender, it will show up to be a bad inquiry that does hurt your score.  
Periodic Review inquiries are when lenders periodically review your credit to see if there are any major changes.  If they see a major change in your score they may close your account.  These are also not supposed to be factored into your credit score.
Inquiries can show a lender how often you are trying to open up new accounts and how recent those attempts were.
Primary consideration is given to the following:

  • Number of inquiries in last six months

  • Number of trade lines opened in the last year

  • Number of months since most recent inquiry

How inquiries are computed is somewhat complex and they should be avoided if possible.  

FACTOR #5 Types of Credit Experience is 10% of your score 
It’s good to have a diverse mix of accounts.  Having installment accounts, retail accounts, credit cards and a mortgage is good.  Since this is only worth 10% of your score, it is not a big factor but can help.  Do not go out a try to open different kinds of accounts because a bad mix may hurt you and lower your score.

Improving Your Credit Score
Now that you know how your score is calculated, you can begin making changes.

  • Pay your bills on time.  This sounds simple, but this is the biggest thing you can do to keep your score high.  Delinquent payments and collections have a major negative impact on your score.

  • Keep your balances low on unsecured revolving debt like credit cards.  High balances still owed can affect a score.

  • The amount of unused credit is an important factor in calculating your score.  You should only apply for credit you need.

  • Make sure the information on your credit report is correct.  If it is not, dispute it with the Bureau Company or lender directly.

  • Removing negative accounts on your credit report has the biggest impact on your score.  Generally negative things can stay on your credit for 7 to 10 years, But you can hire a professional credit repair service to improve it for you.    

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