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Where Does Your Credit Score Come From?

(c) 2006 by Cheryl Williams Levey,

Ever wonder how your credit score is computated? Here's a brief rundown:

The score is calculated by the three major credit bureaus, who generally use a formula developed by FICO (Fair Isaac Corp) to analyze your credit information. Each credit bureau may come up with a different number based on the information they have on file for you, which may differ from bureau to bureau (which is why it's important to check them all). Your FICO score is what most lenders use to determine your interest rate. If you have a high score, you get a lower rate and vice versa. The score can range from 300 to 850.  

The score is calculated based heavily on the following categories:  

1. payment history (35%)

Recent late or non payments are weighted heavier than older ones. Recent history of on-time payments will help offset past deliquincies. Obviously, bankruptcies, foreclosures and other similar actions will significantly lower your score.  

2. amounts owed (30%)

It's crucial to limit the amount of debt you have. Lending institutions like to see that you use your accounts regularly but not to the credit limit. Being close to your credit limit on one or several cards will lose you points. Obviously exceeding your limit will too.  

3. length of credit history (15%)

The average age of all of your accounts combined. Close unused accounts that may be charging fees but don't close older inactive accounts with zero balances. They can positively impact your score by lengthening your credit history. Records of closed accounts are deleted within 10 years.  

4. new credit (10%)

You can lose points for opening several new accounts in a short period of time. Even applying can hurt - even if you are denied. Too many inquiries on your credit report in a short time can hurt. The exception is for auto and mortgage loans - all inquiries are considered on inquiry because you are shopping for the best interest rate.  

5. type of credit (10%)

Having different kinds of credit - credit cards, loans, lines of credit - is positive as it shows you are capable of handling different kinds of payment obligations.  

While your credit score is not included as part of each of your reports, you are entitled to a free copy of your credit report every year from the three credit bureaus (and you are also entitled to a free copy if you are turned down for credit). You can purchase your score from any or all of the bureaus as well.  

Request your credit report at - they provide links to the three credit bureaus. 

You should annually check each one for errors both to have the chance to correct anything that is wrong and also to alert you to signs of identity theft. One good way to keep track is to check one credit bureau in January, one in May, one in September, etc. If you find something wrong, you can file a dispute with the credit bureau and they then have 30 days to investigate. If the lender doesn't respond in that time, the item in question must be deleted from your report. If the lender says the information is correct, you have the right to include your explanation in your report.

 * The information in this article was excerpted from a brochure sent to me by my financial institution.  


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