THE FICO CREDIT SCORING BUILDING-BLOCKS AND YOUR SCORE
Have you ever looked at your credit report and wondered just what the heck all this information is? Have you ever wondered how it is evaluated for FICO credit scoring purposes? And FICO credit scoring accounts for what is estimated at 90 to 95% of all credit decisions.
It’s kind of like looking at an x-ray or an MRI: if you do not know what you are looking for it can be rather confusing. Let me share my expertise on this.
Your credit report is displayed differently depending upon the source. Your credit report, whether you receive it from www.annualcreditreport.com (the only official free site as mandated by law from Experian, Equifax, and Trans Union), a credit monitoring service such as www.creditchecktotal, www.Experian.com, www.Equifax.com, www.transunion.com or any of the myriad of credit monitoring sites, or when you apply for credit through a mortgage company, is broken down into three areas:
2. credit accounts;
3. Public records and collections.
Let’s take a look at these three, a bit more in depth.
(In future blogs, CREDITGENI .US will go over what the FICO scoring model delineates as most important and the factors that apply to those: When you pay, how often you pay, what types of credit you have, the balance of installment versus revolving debts, and how often you apply for credit, are of vital importance.)
One of the building blocks are inquiries – those times that you or other people/companies/creditors access your credit report for approval or review. It could be for insurance purposes, application for credit, checking on your credit for rental purposes, or simply applying for credit for a home or auto purchase. Each time a credit report is pulled there may be a reduction in your score – but this is only for what is called a hard inquiry (or a hard pull).
A hard inquiry (hard pull) is one that you authorize – when you apply for credit. You may want to shop for an auto loan or you are applying for a home loan. The CAVEAT here is that a hard inquiry will cost you in FICO scoring points, usually 3 to 5 points, for each time your credit report is checked. (There are allowances for people that may be shopping for an auto loan or for a home loan.)
Typically, the credit score algorithms will allow a period of time for you to shop for a loan: it may be two weeks to one month in which different creditors check your credit.
However, applying for a credit card is a totally different matter in that each time you apply for a credit card, you will receive a 3 to 5 point credit score reduction. EACH TIME AND EVERY TIME. Remember at Christmas time when you are purchasing gifts for your family and they ask at the register whether you want a 20% discount on what you have purchased, if you apply for a store credit card? Can you imagine what happens to the poor unsuspecting person who applies for 20 credit cards at Christmas to get the 10% discount? What happens is a profound FICO credit score drop.
A soft inquiry is one that you do not individually authorize and does not affect your score. An example is when the credit bureaus sell your information to a marketer.
For example, a marketer may look for people specifically in a particular zip code with scores between 600 and 650. Your name and contact information pops up and the marketers send you advertising.
It may also be someone that you are already indebted to and they will keep on checking your score and trade lines to see if you still meet their criteria. This is used a lot for insurance companies and credit card companies. The authorization to continually pull your credit is usually found in the small print, the boiler plate language, in your contract.
There is a misnomer that if you check your own credit score or credit report, you will receive a credit score reduction. This is simply not true. CHECKING YOUR OWN CREDIT THROUGH A CREDIT MONITORING SERVICE WILL NOT AFFECT YOUR SCORE. PERIOD.
Your Credit accounts
This is what is commonly referred to as trade lines, and they can be anything from installment loans, such as a home loan or a car loan or a revolving charge, like a credit card. For most people, credit accounts are what makes up the bulk of their credit report. Open accounts, or accounts that you are currently paying, whether they are installment or revolving, have the most effect on your FICO credit score.
Closed accounts factor less in your FICO credit score than open accounts, but still are a major factor. A trade line lists the type of account, how long ago you opened it, the balances, and details of your payment history. The amount of your credit limits for revolving debt is not paramount. What matters is the ratio between your balance and credit limit, commonly referred to as your credit ratio, but this only applies to revolving debt and credit cards.
Public records in collections
The last building block for your FICO credit score are public records: collections, bankruptcies, foreclosures, judgments, liens or any other collection items, paid or unpaid. Lenders or collection agencies report most of the information in your report, however, the credit bureaus have a third party source that cull public records looking for bankruptcies and docketed judgments and liens.
So there you have it – your FICO score building blocks in Cliff note format.
In upcoming articles, we will go over how the FICO credit score is derived.