Credit Scores

Written by: Rudy Freeman - on July 28th, 2006

Credit scores are a way to measure your credit status by a pointing system. Many lenders use this method to evaluate your credit applications. The method is known as FICO (stands for Fair, Isaac & Co), and is used by the three largest credit reporting agencies. The maximum scores are about 850 points. However, you need at least 650 points to be considered having a good credit.

Each lender may have a different standard in their credit approval process. However, in most circumstances a score from 620 to 650 means you need more documentation and explanations to credit issuers to get a loan approved. In the same manner, A credit score below 620 may prevent you from obtaining a good loan and boost the interest rates higher.

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The following are the guidelines for determining the FICO scores:

(1) Payment History: about 35% of the score.
(2) Amounts Owed: About 30% of the score.
(3) Length of Credit History: About 15% of the score.
(4) Pattern of Credit Use: About 10% of the score.
(5) Types of Credit in Use: About 10% of the score.

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Payment history includes not only late payment information, but also any bankruptcy filings, collection accounts, judgments, suits, liens, wage garnishment and the like. Amounts owed include data such as total amount of debts, debt amount on each type of accounts (credit cards, car loans, mortgages, etc.), how much of the total credit is being used at the time, how much of the installment loans have been paid, and how many accounts that show positive balances. Length of credit history includes how long each account has existed, how long it has been since you used certain accounts, average time length of all accounts, and the age of the oldest account.

Pattern of credit use contains information on how many new accounts by type, how long an account has been since you opened a new account, how many recent credit requests you have made (by applying for new credit, not by checking on your credit file), and the time length since the last credit requests were made by credit issuers. Finally, types of credit in use include what types of credit accounts you have: credit cards, superstore cards, mortgage accounts, and installment loan accounts.