Credit Score

If you have ever ordered one of these reports you might have felt as you are looking at a math, economics and statistics thesis paper all jumbled up. The credit report can be a bit confusing at first but it is quite easy to read. The report generally lists all your finances, credit cards and banks who have loaned you money.

Each entity will have your high balance, current balance, available balance and your late payments (categorized into 30+, 60+, 90+ days). So you can pretty much glance at your whole payment history with that entity. Now you might have a late payment here and there but how do you figure how good your credit report is? Well to solve that problem credit scores (also known as FICO scores) were introduced. This score factors in all attributes (balance, late payments, etc.) of all the entities. So even a single late payment with one of your 20 creditors will affect this score (although one late payment won’t lower it significantly, but it does affect your score). Even when financers, dealers pull out your credit report it lowers your FICO score. This is known as a hard credit inquiry. Everytime you apply for credit the inquiry is recorded in your credit report and too many inquiries may make you look desperate for a loan which is a big NO-NO. So keep your credit inquires to a limit. On the other hand when you pull up your own credit report it is known as a soft inquiry and that has no effect on your FICO score. So you can review your own credit report every month without affecting your FICO score. Remember when you get your credit report ask them if your score is included in the report or not. This score gives you an overall picture of your credit report without looking at it page by page. The higher the score the better off you are. The exact formulas for computing the score are regarded top secret but the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each to the credit score:

  • 35% — Based on the payment history and punctuality.
  • 30% — The amount of debt, or in other words the amount you owe on your credit cards.
  • 15% — Length of the credit history
  • 10% — Types of credit used (installment, revolving, consumer finance)
  • 10% — Recent applications for credit and amount of credit obtained recently

The FICO score ranges from 375-900 with the median FICO score around 723 and the average FICO score between 620 and 650. The table below shows you the effect of a FICO score on a $150,000 loan payments. (Note: This is just for illustration purposes only. Actual payments may vary on a number of factors such as interest rates.)

FICO Score Monthly payment
850+ <=$840
750-850 $850
690-749 $875
675-689 $885
655-674 $905
635-654 $950
620-634 $1000

Over a year a 750+ FICO score can save up to $1,200 than a FICO score of 650 or less.

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