Wonder how credit scores are created and how to increase your FICO scores? Here are the answers from MSN Money at http://moneycentral.msn.com/content/...ng/P138423.asp
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Anatomy of a Credit Score
By Toddy Gutner, BusinessWeek
During a shopping spree a few months ago, I opened several retail credit-card accounts to take advantage of an immediate 10% discount on that day's purchases. Surely this familiar offer was risk-free as long as I paid my bills on time, right?
It wasn't until I reported this story that I found out my credit score could have been negatively affected by the spate of new accounts I opened in such a short time. I had no idea.
Many people are ignorant of what their credit score is, how they can hurt or help that score and how it can be used against them. Some 49% of 1,013 consumers polled in a 2005 survey by the Consumer Federation of America and Fair Isaac did not understand that credit scores measure credit risk. Fair Isaac created FICO, the most widely used credit-score formula.
Lenders have used these scores for years to determine whether to grant you a loan and at what interest rate. "Credit scores are very powerful predictors of consumers' future (bill-paying) performance," says Mike Fratantoni, a senior research director at the Mortgage Bankers Association. But with the rise of technology that can automatically assess consumer creditworthiness while you wait, FICO scores now are requested by insurance companies, cell-phone providers, utilities, landlords and even prospective employers. That's a reason to make managing your FICO score a priority.
Recipe for a credit score
But first, just what is a credit score? To calculate a score, Fair Isaac uses 22 pieces of data collected from the three major credit bureaus, Equifax, Experian and TransUnion). The lowest possible score is 300, while the highest is 850.
The final number is a composite of individual ratings in five categories:
- Payment history (35% of the rating)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
- Debt (30%)
Income is not a factor. "A person can have a very high income and never pay their bills," explained Craig Watts, public affairs manager for Fair Isaac.
Fair Isaac calculates a FICO score based on the data provided by each credit bureau. It's not uncommon to see up to a 50-point differential between ratings. The reason: Bureaus collect data at different times of the month, and one bureau may have inaccurate information.
The higher the score, the lower the risk you are to a creditor -- and the less interest you'll pay. Only 13% of the population has FICO scores of 800 or above; the median is 723. There is no single cut-off for loans, however, and cut-offs employed vary from industry to industry. Generally, borrowers with scores above 740 receive the best rates.
To see how a change in your FICO score affects how much you'll pay, consider this example. On a $350,000, 30-year fixed mortgage, you'll pay 6.24% in interest and $2,153 a month if you score between 720 and 850. If your score drops to between 620 and 674, your interest rate jumps to 8.05%, and your monthly cost rises to $2,581. You will pay an additional $154,131 over the life of the loan, according to a calculator on myfico.com.
Keep an eye on your score
____________________________
Anatomy of a Credit Score
By Toddy Gutner, BusinessWeek
During a shopping spree a few months ago, I opened several retail credit-card accounts to take advantage of an immediate 10% discount on that day's purchases. Surely this familiar offer was risk-free as long as I paid my bills on time, right?
It wasn't until I reported this story that I found out my credit score could have been negatively affected by the spate of new accounts I opened in such a short time. I had no idea.
Many people are ignorant of what their credit score is, how they can hurt or help that score and how it can be used against them. Some 49% of 1,013 consumers polled in a 2005 survey by the Consumer Federation of America and Fair Isaac did not understand that credit scores measure credit risk. Fair Isaac created FICO, the most widely used credit-score formula.
Lenders have used these scores for years to determine whether to grant you a loan and at what interest rate. "Credit scores are very powerful predictors of consumers' future (bill-paying) performance," says Mike Fratantoni, a senior research director at the Mortgage Bankers Association. But with the rise of technology that can automatically assess consumer creditworthiness while you wait, FICO scores now are requested by insurance companies, cell-phone providers, utilities, landlords and even prospective employers. That's a reason to make managing your FICO score a priority.
Recipe for a credit score
But first, just what is a credit score? To calculate a score, Fair Isaac uses 22 pieces of data collected from the three major credit bureaus, Equifax, Experian and TransUnion). The lowest possible score is 300, while the highest is 850.
The final number is a composite of individual ratings in five categories:
- Payment history (35% of the rating)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
- Debt (30%)
Income is not a factor. "A person can have a very high income and never pay their bills," explained Craig Watts, public affairs manager for Fair Isaac.
Fair Isaac calculates a FICO score based on the data provided by each credit bureau. It's not uncommon to see up to a 50-point differential between ratings. The reason: Bureaus collect data at different times of the month, and one bureau may have inaccurate information.
The higher the score, the lower the risk you are to a creditor -- and the less interest you'll pay. Only 13% of the population has FICO scores of 800 or above; the median is 723. There is no single cut-off for loans, however, and cut-offs employed vary from industry to industry. Generally, borrowers with scores above 740 receive the best rates.
To see how a change in your FICO score affects how much you'll pay, consider this example. On a $350,000, 30-year fixed mortgage, you'll pay 6.24% in interest and $2,153 a month if you score between 720 and 850. If your score drops to between 620 and 674, your interest rate jumps to 8.05%, and your monthly cost rises to $2,581. You will pay an additional $154,131 over the life of the loan, according to a calculator on myfico.com.
Keep an eye on your score
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