A credit score is a number that predicts how an individual is likely to repay a debt. This site exists for people living or moving to Kentucky, those of you that are native to the state will probably understand odds. That is exactly what a credit score is, the odds that an individual will pay back a loan as agreed. The higher the credit score the more likely the debt will be paid as agreed. The lower the score the longer the odds are that any of the payments will come in on time.
There are lots of different credit score models, the most famous being the FICO score, developed by the Fair Isaac Corporation. FICO scores range from 300 to 850. Individuals with credit scores above 740 rarely do anything wrong when it comes to the items that impact their score. They rarely if ever have late payments, or any other entries that are considered a negative factor. Individuals with scores below 600 have had credit issues in the recent past. Individuals with credit scores below 500 are probably not going to pay back the loan at all.
One question frequently asked by my clients is why the scores on my report is different than the one they got for free from an online.
The one you get for free is not as thorough as the one I pay for, you get what you pay for. Another reason is they can change in a moment; in fact just pulling a report can change the score. Any activity, no matter how small can change the factors.
What is Included?
The bulk of your score is made up of two components, 35% is based on Payment History. The more payments made as agreed the more points added, but a few late payments will kick the stuffings out of the numbers. This segment includes all negative entries. It is worth noting that the negative stuff is onlt 35% of the matrix.
The other largest segment is the Amount Owed. Most people understand having late payments will result in a lower score but hardly anyone gets this part right. Almost everyone I help believes that using their credit card as much as possible helps their score as long as the payments are made on time. Exactly the opposite, if you max out a credit card it will hit your score as much as a couple of late payments!
The above graph is courtesy of MyFico.com
Two of the remaining sections are fairly easy to grasp. Length of Credit History is just what it sounds like, the longer accounts are open the better. Two years seems to be the magic line. If you have a pattern of opening accounts and then closing them six months later it will pull down the total points.
New Credit is almost an extension of the Length, accounts less than a year old will subtract points, several new accounts will punch them in the head. Not good.
The last section is hardly ever discussed. The source of your debt is almost as important as the age of the account. This is a little weird, what difference does it make who you borrow money from? Because of the terms, if you lean towards borrowing money from a source that charges a high interest rate it shows a lack of financial management.
The entire scoring system measures how you manage money. The better job you do the higher your score will be. On another page we will discuss how to use this information to build a strong score.