Credit report and FICO Score

A credit report is a statement which generally shows your credit activities during the past seven to ten years. It lists all types of credit issues like any loans you have opted for, credit card dues, the balances in your credit cards, and your payment history i.e., how conscious you are in repaying these loans. The listings in your credit report is generally categorized under four heads – Identifying information, credit information, public record information and inquiries. Your identifying information includes your name, social security number, birth date, and information about your spouse. Credit information includes your loans with banks, credit card companies, utility companies and even mortgage loans. Public record may include court records on bankruptcy, tax liens, and judgments and finally hard inquiry information includes the name of the creditor who got access to your credit report in the last two years. Based on this information, your FICO score is calculated which forms the basis of your loan eligibility. There are three credit reporting agencies or credit bureaus who prepare your credit score. They are Experian, Transunion and the Equifax.

Developed by Fair Isaac and Company, FICO score is a type of credit score which is widely used by the creditors to determine your potentiality as a debtor. It is a credit scoring model developed in the late 1950s which has been accepted by almost all types of lenders to determine your eligibility as a borrower. Credit score is a numerical three digit score, which normally ranges from 350 to 850 points and is based on the listings on your credit report. The more is your score, lesser interest rate you need to pay on your loans and hence a better deal. FICO score is generally measured in terms of five parameters with maximum weight on your credit history. The five parameters on which your credit score or your FICO score depend are as follow:

• Payment History – It contribution is about 35% in you credit score and so it is always advisable to maintain a good credit history. For this it is always advisable to make timely debt payments and not to miss any payments.
  

• Amounts Owed – Amounts owed contributes about 30% in your credit score. Because of its importance as a factor in determining your credit score, one should not exhaust the entire credit card limit in purchasing through the card. This lowers credit score. Instead, one should focus spending only 30% of the credit limit. Pay back the debt and then reuse it.

• Length of the credit history – Length of the credit history constitutes about 15% in your credit score. So in order to make the payment history long, advisors always suggest not closing any old credit card accounts. Rather, one may close any new account if he is not able to continue with the annual card fees.

• New Credit – Applying for a new credit constitutes about 10% in your credit score. Whenever you apply for a new credit, creditors make an inquiry on your credit report through the credit bureaus. This is known as hard inquiry and it remains in your credit report for two years. Too many hard inquiries suggest that you are “credit hungry” which gives negative impact on your credit report and hence lowers your credit score. And finally

• Types of credit used – This factor contributes 10% in your credit score. This includes the number of credit card, loan and mortgage accounts etc you hold. Too many loan accounts may lower the score because it may suggest that if you take any further loan, you may be delinquent.

It may be noted that FICO takes into account all the five factors in determining your credit score – not just one or two of the factors.