Everything to Know About Credit Scoring Decisions

Unless you intend to use cash for all your purchases in life, you need to start thinking about your credit score and how it could impact your life’s goals and dreams. Your credit score is a three-digit number that offers potential lenders an overview of your financial reputation. However, your score will vary by several points depending on what reporting agency you use, as there are several credit scoring models that could be used to issue the final number. The FICO credit score is the most widely recognized, and there are still more than 50 different versions of the score that could be sent to a particular lender. The information that impacts your credit scoring decisions depends on what the potential lender has requested. The scores needed for a retail or store credit card would be different than those required for an auto loan or a mortgage. The inquiring company could also pull your Vantage Score, a Community Empower score, or a score issued by one of the three major reporting bureaus. These are Equifax, Experian, and TransUnion.

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Knowing How Scores are Calculated

Scoring models are the statistical assessment of your creditworthiness. That is, how much financial rapport you have. The overall score is derived from a complex algorithm that assesses your credit payment patterns. Though the factors impacting your score are relatively easy to remember, the percentage weight these areas hold on the overall number is a lot harder to interpret. Most calculations include the number of credit cards held, the number of credit card charge-offs, the timeliness of payments, the frequency of payments, and the overall payment record for each account. Your score can range anywhere from 300 on the low end of the assessment all the way to 850 (the top-scoring number). Where your number falls on the spectrum indicates the level of risk a lender will assume by extending financing to you. The higher your score, the more favorable the terms of the loan will be for you.

The FICO Model

When it comes to requesting your credit score, the FICO scoring model is usually considered the most reliable. Although it was implemented in 1989, it has seen several changes in the last thirty years to account for the different factors that have evolved in the world of creditworthiness. The standard scoring still provides consumers with a three-digit number between 300 and 850, with the higher the number, the better the financial history. With a FICO score, anything above 740 is usually considered excellent, while a score under 600 is labeled as poor credit.

In 2014, the scoring model was updated to put less emphasis on unpaid medical bills. With this new change, consumers aren’t hindered by a medical debt that is beyond their control. For many, insurance companies and untimely payments were the reason for a lower score or an account in collections. Any of these unfortunate situations could potentially drop a score of up to 25 points. In 2017, the tax lien records and civil judgment data were removed from credit files, but it only improved the credit score of about 6% of consumers across the nation. However, 2017 also brought a change in collection agency reporting criteria, with medical debts left out until it is 180 days past due.

The Details of Calculation “Credit Scoring Decisions”

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While things like medical debt reporting can affect your score, the five primary factors that influence a classic FICO number don’t change. These areas are payment history, credit utilization, credit history, types of credit, and new credit accounts. There are additional sub-categories that help determine the calculation of each area, and the following information breaks down the information more fully.

  1. Payment History. This is the largest category impacting your score, as it counts for 35% of the final number. As long as you don’t have negative public records for liens, foreclosures, lawsuits, bankruptcies, or late payments, you should have high marking in this area. Any late payments reported could lower your score by up to 20 points, although the later the payment, the worse the effect. Though it is rumored that accounts aren’t reported late until past the 30-day mark, this isn’t always a guarantee.
  2. Credit Utilization. This is the second-largest reporting category, accounting for 30% of your FICO calculation. You should always keep account balances at 30% or less of the available credit limit. You should also strive to pay your balance in full each month. If your score needs a boost, you can always call up a credit card company and ask for an increase in the credit line. This could automatically improve your score, but you increase the chances of getting further into debt or unmanageable payments.
  3. Credit History. At 15% of your score, this is another area to keep an eye on. The longer you are able to keep your credit card or credit account in good standing, the higher your score will go. If you have paid off the balance of a card, don’t just assume that you should close it. Leaving it open and using it sparingly is the best way to develop a good credit history.
  4. Credit Use. This category is worth 10% of your score, and FICO looks at the different forms of credit that you may have open. They could range from a mortgage, auto loan, credit card, or utilities. It’s helpful to have a diverse credit history on your report, but don’t open up new credit accounts too fast. It sends a negative impression that you are desperate for credit.
  5. New Credit Accounts. The final category is worth 10% of your FICO score, and it deals with how often you apply for a credit card or other lending assistance. It is okay to have more than one credit card, but when you apply for several at one time, it can send the message that you are using one form of lending to pay off another. You should also spread out your timeline for applying for a home loan and a new car. Consider how too many credit applications can look irresponsible, and take a few months before attempting to receive additional lending.

Your credit score provides the likelihood of your ability and commitment to repay any debts. It is one of the most valuable financial resources you will ever have, so make sure to review your score regularly to stay on top of how they rate your credit scoring decisions.