Every since I began selling homes as a Realtor 30 years ago (and now as an instructor at Garden State Real Estate Academy), people have asked me how their credit score is compiled. I know my friends at SureWay Property Management get asked the same question by both their landlord clients and the tenants who applied to rent from them.
For most of those years, the universally-accepted measurement was the FICO score. Here’s a piece of useless trivia for you. The algorithm was invented by two friends, Bill Fair and Earl Isaac, who met as students at Stanford in the 1950s and then started a company called Fair, Isaac Co, or FICO, and promoted their FICO score to lenders and financial institutions as a way that all such companies could evaluate the credit risk of the public.
For years, all three major credit rating agencies, Experian, Equifax and TransUnion used slightly different weightings to arrive at their score (thus, one person will almost certainly have three different scores from the three companies), and they then sent their scores to FICO. The generally-accepted “brackets” are:
Below 600: Sub-par, bad credit. It is possible to score as low as 300.
600-649: Poor credit, but does just qualify for a mortgage if above 620-640
650-699: Decent, but not great credit.
700-749: Good credit
750 and above: Excellent credit. The highest score you can get is 850.
The FICO score is based on several calculations: the amount of debt available to you, the percentage of your available credit that you are actually using, the timeliness of your bill payments, the number (and type) of credit obligations, and so on.
Lenders will then buy the scores from FICO, but they often use different modeling to ascertain how to approve or disapprove you. For example, a mortgage company may weigh more heavily your record of paying mortgage loans on time; apply for a car loan and that finance company may look at your track record of making timely car payments in the past.
The method of constructing a credit score is complicated and each company keeps its algorithm confidential, but credit counselors say that the following is a general guide:
35% of your score comes from past payment history
30% comes from credit utilization—meaning the percentage of your available credit that you use. You should try not to exceed 35% of the credit limit you have available. One credit analyst estimates that spending one dollar over your credit card’s limit can make your score drop 100 points!
15% comes from how long you have had credit accounts open. This is it generally a good idea not to close dormant credit accounts.
10% of your credit score comes from the variety of credit you use. So having 6 credit cards is not considered as creditworthy as having 2 bank credit cards, one car loan, one mortgage loan, one retail store card and one gas company card.
Finally, as much as 10% of your credit score can be affected by the number of new enquiries you have had recently. If you are shopping, if is not a good idea to open half a dozen store credit cards-no matter how good the deals they offer may seem!