How are Credit Scores Calculated

A credit score is an indicator of how likely you are to default on a loan or credit card in the next 24 months. This information is used by credit grantors when evaluating your credit for approval. Your BEACON®, FICO® or EMPIRICA® score is based solely on information in your credit file maintained by the credit reporting agencies. Other scores may be based on a combination of credit information and other information that you supply on your credit application.

The way you have handled credit in the past may indicate how you will manage credit in the future. Credit scores cannot predict with certainty how you will manage credit, but they do provide an objective estimate of how likely you are to repay on time and according to terms.

How Are Scores Calculated?

Your credit report is the basis of your FICO® score. The report details your credit history as it has been reported to the credit reporting agency by lenders who have extended credit to you, by court records and by you. The FICO score analyzes information from the trade line, inquiry, public record and collection sections of your credit report.

A FICO score evaluates five main categories of information in your credit report, and compares this information to the patterns in hundreds of thousands of past credit reports. These five categories are, in order of importance:

1. Payment history — what is your track record? 35 % of the score

Risk predictors here look at:

·   Severity – how bad are the delinquencies?

·   Recency – how recent are they?

·   Frequency – how many times did it occur?

2. Amounts owed — how much is too much? 30% of the score

      Risk predictors here look at:

·   Large outstanding balances

·   The ratio of balances to credit limits

3. Length of credit history — how established is yours? 15% of the score

      Risk predictors here look at:

·   Age of the trade lines - (the age of the oldest account,

the average age of accounts, or both).

4. New credit — are you taking on more debt? 10% of the score

Risk predictors here look at:

·   Number of inquiries and new account openings 

5. Types of credit in use — is it a healthy mix? 10% of the score

      Risk predictors here look at:

·   Number of trade lines reported for each type: bankcards, retail, department store cards, installment loans, etc.

To give lenders a broad view of your credit history, the BEACON®, FICO® and EMPIRICA® score takes into consideration both positive and negative information from all five categories. Your BEACON®, FICO® and EMPIRICA® score changes when information is added, changed or removed on your credit report.

Although each credit reporting agency formats and reports credit information differently, all credit reports contain basically the same categories of information.

When a lender receives your BEACON®, FICO® and EMPIRICA® score, up to four score factors are also delivered. These explain the top reasons why your BEACON®, FICO® and EMPIRICA® score was not higher. If the lender rejects your request for credit and your BEACON®, FICO® and EMPIRICA® score was part of the grounds for his/her decision, score factors help the lender tell you why your score wasn’t higher.

Score factors are useful in helping you determine whether your credit report might contain errors, as well as how you might improve your score over time. However, if you already have a high BEACON®, FICO® and EMPIRICA® score (usually in the mid-700s or higher), score factors may not be as helpful, since they represent very marginal areas where you could improve your score.

Please bear in mind that the ordering of the score factors is important. The first code indicates the area where you lost the most points, the second code is where you lost the second most points, and so on. In other words, concentrate on the first one or two score factors. The third and fourth factors (if present) are not as significant.

Ask your lender how you can improve your credit picture, if your credit application was turned down or you didn't qualify for the interest rate you wanted. If you have been turned down for credit, the Equal Credit Opportunity Act (ECOA) gives you the right to obtain the reasons why within 30 days. You are also entitled to a free copy of your credit bureau report within 60 days, which you can request from the credit reporting agencies.

If the BEACON®, FICO® and EMPIRICA® score was a primary part of the lender’s decision not to extend credit to you, the lender can use score factors to explain why your score was not higher. Lenders often may not tell you your score because score factors are usually more useful in explaining how you can improve your credit quality over time. Lenders are not required to disclose your score, but you can ask.

If you live in California, a new state law effective July 1, 2001 requires credit reporting agencies such as Equifax to make credit scores available via U.S. Mail to Californians upon request. If you are a resident of California and you are interested in obtaining your score please contact Equifax at (800) 685-1111 or at www.econsumer.equifax.com

Your BEACON®, FICO® and EMPIRICA® score takes into account how much of your total credit line is being used on credit cards and other revolving credit accounts. Someone who is closer to “maxing out” on many credit cards or has large amounts of outstanding debt may have trouble making payments in the future, and this is reflected in the BEACON®, FICO® and EMPIRICA® score calculation.

The most effective ways to improve your BEACON®, FICO® and EMPIRICA® score in this area are:

·         Pay all bills on time

·         Pay down your debt rather than moving it around

·         Don’t close unused credit cards as a short-term strategy to raise your FICO score.

·         Don’t open new credit cards for the purpose of increasing your available credit.

The rules regarding how long the bureaus generally keep information on credit accounts are as follows:

Credit Accounts:

Accounts paid as agreed remain for up to 10 years.

Accounts not paid as agreed remain for 7 years.

Collection Accounts:

Remain for 7 years.

The time periods listed above are measured from the date in your credit file shown in the "date of last activity" field accompanying the particular credit or collection account.

Courthouse Records:

Remain for 7 years from the date filed except:

Bankruptcy — Chapters 7 and 11: remain 10 years from date filed.

Bankruptcy — Chapter 13 non-dismissed or non-discharged remains 10 years from the date filed.

Unpaid tax liens remain indefinitely.

Paid tax liens remain for up to 7 years from the date released.

New York State Residents Only: Satisfied judgments remain 5 years from the date filed; paid collections remain 5 years from the date of last activity.

California State Residents Only: All tax liens remain 7 years from the date filed.

Improving your score will take time and often there is no quick fix. BEACON®, FICO® and EMPIRICA® scores reflect credit payment patterns over time with more emphasis on recent information.

There is no mystery about how people can improve their BEACON®, FICO® and EMPIRICA® scores. BEACON®, FICO® and EMPIRICA® scores reflect the long-term patterns of credit use and repayment history over time. BEACON®, FICO® and EMPIRICA® scores automatically improve as your overall credit picture gets better. That means showing an historical pattern of paying your bills on time and using credit conservatively.

Focus on the four score factors provided with your BEACON®, FICO® and EMPIRICA® score. These represent the main areas where you are not receiving maximum points. Here are some general tips all consumers should follow:

DO:

·         Pay your bills on time. Delinquent payments and collections can have a major negative impact on your BEACON®, FICO® and EMPIRICA®score.

·         If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your BEACON®, FICO® and EMPIRICA® score.

·         If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won’t improve your BEACON®, FICO® and EMPIRICA® score immediately, but if you can begin to manage your credit and pay on time, your score will improve.

·         Keep balances low on credit cards and other revolving credit. High outstanding debt can affect a BEACON®, FICO® and EMPIRICA® score.

·         Pay off debt rather than move it around. The most effective way to improve your BEACON®, FICO® and EMPIRICA® score in this area is by paying down your revolving credit.

·         Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them on time will raise your BEACON®, FICO® and EMPIRICA® score in the long term.

·         Note that it’s OK to request and check your own credit report. This won’t affect your BEACON®, FICO® and EMPIRICA® score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

·         Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix — it probably won’t raise your BEACON®, FICO® and EMPIRICA® score.

·         Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) may improve your BEACON®, FICO® and EMPIRICA® score. Someone with no credit cards, for example, tends to be higher-risk than someone who has managed credit cards responsibly.

·         Do your rate shopping for a loan within a focused period of time. BEACON®, FICO® and EMPIRICA® scores distinguish between a search for a mortgage or auto loan (where it is customary to shop for the best rate), and a search for many new credit lines.

DON'T:

·         Don’t close unused credit cards as a short-term strategy to raise your BEACON®, FICO® and EMPIRICA® score.

·         Don’t open a number of new credit cards that you don’t need, just to increase your available credit. This approach could backfire and actually lower your BEACON®, FICO® and EMPIRICA® score.

·         If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a greater effect on your BEACON®, FICO® and EMPIRICA® score if you don’t have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user. Do your rate shopping for a given loan within a focused period of time. BEACON®, FICO® and EMPIRICA® scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

BE AWARE THAT:

·         Paying off collection accounts, or other derogatory items will not remove them from your credit report. The fact that this event occurred is predictive, in addition to any dollar amount associated with the past due.

·         Closing an account will not remove it from your credit report and may not improve your score.

What are the most common score reason codes?

Here are the top 10 most frequently given score reason codes. Note that the specific wording given by your lender may be different:

• Serious delinquency.
• Serious delinquency, and public record or collection field.
• Time since delinquency is too recent or unknown.
• Level of delinquency on accounts is too high.
• Number of accounts with delinquency is too high.
• Amount owed too high on accounts.
• Ratio of balances to credit limits on revolving accounts is too high.
• Length of time accounts has been established is too short.
• Too many accounts with balances.

Credit Scores Make a Difference

Along with the credit report, lenders can also use a credit score based on the information in the report. That score is calculated by a mathematical equation that evaluates many types of information that are on your credit report at that agency. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score identifies your level of future credit risk.