Credit Score F.A.Q.

  What in the world is a credit score?

"The FICO score is the single best summary score of one's credit worthiness," says E-Loan President and Chief Operating Officer Joe Kennedy.

It's a number lenders use to help them decide: "If I give this person a loan or credit card, how likely is it that I will get paid back on time?" A score is a snapshot of your credit risk picture at a particular point in time. The higher the score, the lower the risk to lenders. It's designed to give lenders a fast, accurate prediction of the risk involved in giving you a loan.

  What is the highest and lowest credit score?

Credit Scores range from 300 to around 900, with the vast majority of people falling in the 600s and 700s. The higher the score, the better, because of the lower predicted credit risk for lenders.

  What is the Credit Score Average?

If your credit score is over 800, you're in the top 10% of the populace.

If your score is about 710, you're right in the middle. (Half of the US population is better, and half is worse.)

If your score is below about 575, you are in the bottom 10%.

  What key factors define my credit score?

Every score is calculated by using a mathematical formula that evaluates many types of information on your credit report, compared to information patterns in millions of past credit files. The score can then identify your level of future credit risk.

When determining how high a score will be, five characteristics separate the cream of the crop from everyone else. Listed from most important to least important:

Payment History:

People who have failed to make payments in the past tend to do the same in the future. More late payments equals more risk to a lender.

Amount Owed:

Someone who is maxed out or close to the limit on a credit card is considered a greater risk than someone who doesn't look at the high credit line as a license to print money.

Length of Credit History:

Fair, Isaac's model assumes people who have had credit for a long time are less risky. This shows that a borrower has long term stability and a proven track record.

New Credit Requests:

The system frowns upon those who have initiated several requests for credit cards, loans or other debt instruments over a short period of time.

Types of Credit in Use:

Someone with only a secured credit card is generally riskier than someone who has a combination of installment and revolving loans. (On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.)

Mortgages:

By Freddie Mac standards, borrowers with FICO scores above 660 are likely to have an "acceptable" credit reputation and their loan files need only a basic review. The credit risk is "uncertain" for those with scores between 620 and 660, with a thorough review of the borrower's entire credit history. A score below 620 indicates "high risk" with an unacceptable credit reputation that could make traditional financing difficult to obtain.

Credit cards:

Credit card lenders place additional weight on credit card-related information, such as how many times a person missed revolving credit payments. And the systems evaluate a college student targeted for a starter card differently than a platinum-toting stockbroker with a summer home in the Hamptons.

Auto lenders:

Auto scores, on the other hand, focus on "deal characteristics" in much the same way the mortgage scores do, David Shellenberger, product manager at Fair, Isaac and Co., says. They take into account things such as the amount a customer puts down, for example, as well as a borrower's debt-to-income ratio, length of time at one job and the like. As with credit card lending, information about past performance on similar types of loans is weighted, so a missed Nissan payment might be more important than an overdue Visa bill.

  How would knowing my credit score help me?

Credit experts say you can use it to improve your creditworthiness and negotiate for the best possible terms.

"These are very intimidating transactions," says Eric Cunliffe, former president and CEO of HomeSpace Inc., now a division of Lendingtree.com. "A mortgage is probably the single biggest transaction most people make in their lives. The traditional approach -- 'no one will tell me where I stand' -- only exacerbates the process. If you have very good or excellent credit, you know you should be qualifying for the best rate available."

That won't happen, though, if the first time you look at your score is when you have the contract for your dream house in your hands and the clock to closing is already ticking.

"The problem is that lenders grade mortgages on a FICO score," Michael Feldman, a co-founder of MortgageIT.com, says. "At the point a lender is doing that, you can't change it. If you do it three to six months ahead of time, then you have ample time."

Given the competition in the field, just about any mortgage broker will be happy to run a credit report for you -- even if you're not planning to buy a house for a year -- to get you prequalified.

  What factors does credit score ignore?

Your race, color, religion, national origin, sex, or marital status Your age Your salary, occupation, title, employer, date employed, or employment history Where you live Certain types of inquiries such as promotional, account review, insurance or employment related inquiries Any information not found in your credit report Any information that is not proven to be predictive of future credit performance

  Why would a lender want to  use a credit score?

Credit Scores provide an extremely valuable guide to future risk based solely on credit report data. The higher the consumer's score the lower the risk to lenders when extending new credit to a consumer. An estimated 78% of mortgage lenders tend to use scores to determine risk.

  Is it possible for me to NOT have a credit score?

For a score to be calculated on your credit report, the report must contain at least one account that has been open for six months or longer. In addition, the report must contain at least one account that has been updated in the past six months. This ensures that there is enough information, and enough recent information, in your report to compute an accurate score. Your score also will not calculate if there is a fraud statement on your credit file or if all trade lines are disputed.

  How often does a credit score change?

Your credit file is continually updated with new information from your creditors. The score is calculated based on the latest "snapshot" of information contained in your file at the time the score is requested. So your FICO score from a month ago is probably not the same score a lender would get from the credit reporting agency today. Fluctuations of a few points from month to month are quite common.

  How can I increase my credit score results?

Your FICO score analysis will suggest things you can do to improve your score overtime. Generally, people with high scores consistently:

Pay bills on time. Keep balances low on credit cards and other revolving credit products Apply for and open new credit accounts only as needed.                                    

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