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How credit scores are determined.
In June 2000, Fair, Isaac surrendered to increasing pressure from Congress and consumer groups and released a list of the criteria it uses to determine credit scores. In addition, the company plans to develop a web feature so you can check your own score.
The five main criteria are:
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Your payment history payment history on credit cards, retail accounts at stores, installment loans, and mortgages. 35% of total score .
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Amounts owed. What is important is how many accounts have balances and how much of the total credit line is being used on credit cards and other "revolving credit" accounts. 30% of total score.
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Length of credit history. That’s why parents should help children establish credit histories before they go out on their own. 15% of total score.
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New credit. Applying for too much new credit is one of the easiest ways for people to inadvertently harm their credit score. (10% of total score)
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Types of credit. This takes into account your mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. (10% of total score)
The scores that companies like Fair, Isaac compile are sent to the credit reporting agencies as composite numbers. In addition to your salary and other factors mentioned above, here are some of the things that scoring agencies consider:
- Your education level. It sounds arbitrary, but it’s true. A college-educated person is given more “points” than a high school graduate, for example.
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The number of years you’ve lived in a single location. If you’ve moved around a lot, you lose precious points. If you’ve moved because of a better-paying job, you can recoup some of those points if your salary has increased, for example.
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The number of years you’ve worked for a single employer. Scoring agencies like people who are stable. That’s why they assign more points to people who’ve lived in a particular place for several years or who’ve worked for a single employer for many years.
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Are you a homeowner? If you are, you get additional points. Renters are considered more transient and less reliable to repay their loans.
If all of this sounds arbitrary or unfair, remember that scoring systems have allowed department stores and other lending agencies to offer those “on-the-spot” credit approvals. You know the routine. You fill out some basic information on a card and five minutes later (if the computer is working properly), you’re either approved or disapproved for a loan.
Fair, Isaac is only part of the process. Once the company processes a score, it is then transmitted to the lender, which makes the ultimate decision on whether a credit application is approved or denied. Lenders insist that the scoring system does not unfairly hurt minorities, but simply reflects overall lending histories.
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