THE CREDIT BUREAU AND THE CREDIT SCORE

A credit score is a number that summarises the level of the applicant’s credit risk, based on a snapshot of their credit report at a particular point in time. The most widely used credit score is FICO scores, created by Fair Isaac Corporation. As

Examining Fair Isaac’s scoring methodology, we find that the FICO Score is a number between 300 and 850 and is calculated from customer data which are grouped into five categories.

FICO Credit Education: What’s in your credit score

Those five groups are:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Types of credit used.

Payment history makes up the biggest portion at 35% of the total score, which shows the value of this particular metric. The other major group is Amounts owed at 30% of the total score. Then we have smaller groups that are 15% for Length of credit history, 10% for new credits, and finally 10% for Types of credit used. If we look at these percentages we find that the major portion of the score represent 80% for the first three elements. These describe the true picture of the how prompt the creditor is taking into account the amount, promptness and length of their credit history. These three elements tell us that how prompt the borrower was in payment, at what level, and for how long. The percentages in the diagram reflect how important each of the categories is in determining FICO score. Let us now examine each of these categories in detail.

Payment History

  • Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
  • Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
  • Severity of delinquency (how long past due)
  • Amount past due on delinquent accounts or collection items.
  • Time since past due items (delinquency), adverse public records (if any), or collection items (if any)
  • Number of past due items on file Number of accounts paid as agreed.
  • Amount owing on accounts
  • Amount owing on specific types of accounts
  • Lack of a specific type of balance, in some cases
  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
  • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans) Amount owing on accounts / on specific types of accounts. Lack of a specific type of balance, in some cases. Number of accounts with balances. Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)

Length of Credit History:

  • Time since accounts opened
  • Time since accounts opened, by specific type of account
  • Time since account activity

New Credit:

  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems

Types of Credit Used:

  • Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

What FICO doesn’t cover

FICO scores consider a wide range of information on your credit report. However, there are things they do not consider:

  • Race, colour, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
  • Age.Other types of scores may consider the age, but FICO scores don’t.

The salary, occupation, title, employer, date employed or employment history.

Lenders may consider this information, however.

  • Where the borrower lives.
  • Any interest rate being charged on a particular credit card or other account.
  • Any items reported as child/family support obligations or rental agreements.
  • Certain types of inquiries (requests for your credit report or score).

FICOscore does not count any inquiries you initiate, any inquiries from employers, or any inquiries lenders make without your knowledge.  Any information not found in your credit report. Also, any information that is not proven to be predictive of future credit performance.

The Fico Score has the following numbers representing the level of risk:

  • Excellent:      800 to 850
  • Very Good:   740 to 799
  • Good:            670 to 739
  • Fair:                580 to 669
  • Poor:              300 to 579
A sample FICO credit score of 754.
A sample Credit Report from FICO.

This illustration above is an example of FICO score for a customer that got a score 754 due to having a great payment history and very good amount of debt. The main reason for not achieving a score over 754 is the short length of credit history, which a credit evaluator may evaluate as a signal that the customer will move to a higher score in time.

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