Credit scoring systems are numerical grades based on an analysis of an individual’s credit history. When it comes to rebuilding credit, this is the main focus of most consumers — and rightly so.
Types of Credit Scoring Systems
There are many credit scoring systems in the market today, including the VantageScore developed by the three major consumer credit reporting agencies (Equifax, Experian and TransUnion). But the most popular system in decades has been FICO, created by the Fair Isaac Corporation.
However, there are actually several different types of FICO scoring systems available. For starters, each of the three major credit reporting agencies use a re-branded version of the FICO credit score developed by the Fair Isaac Corporation:
- The Beacon score is a FICO system used by Equifax
- The Experian/Fair Isaac Risk Model was developed for Experian (formerly TRW)
- Empirica is the FICO scoring system used by TransUnion
Fair Isaac Corporation also launched the NextGen Score system, but it has not come close to matching the success of the original FICO score.
Dissecting the FICO Scoring Algorithm
The exact algorithm behind the FICO scoring system is not publicly available, but the broad outlines of the factors used to calculate individual credit scores are known:
- Payment history: 35%. Your payment history is the most important factor with your credit score, especially for current accounts and for the most recent periods. Late payments will push your score lower, while on-time payments will push it up. Note that most creditors will not consider or report you late until you are at least 30 days late. But keep in mind that it gets worse if you’re really late (i.e. 60-day, 90-day, etc.).
- Credit ratio: 30%. Your credit cards can be one of the best tools in your credit rebuilding arsenal. The ratio of your credit card balances against your credit limits can help or severely hurt you. If you’re maxed out on your cards, your score will suffer. But if you have low credit card balances compared to your credit limits, then those accounts will push up your score. This is why you should avoid closing any credit cards with low balances — especially if you’re trying to build up your credit score.
- Credit age: 15%. Older accounts have a stronger positive impact on your credit scores, especially if those accounts are still active. Again, this is why you shouldn’t close out old credit card accounts, especially if you have low balances and an opportunity to use them to rebuild your credit grades.
- Account types: 10%. Not all accounts are treated equal. Credit cards are nice, but credit scores tended to give more respect to mortgage loans and other installment debts (car loans, personal loans, etc.). Overall, it’s good to have a mix, but when you’re just starting your credit repair efforts, you’ll probably need to start with credit cards first. But if you currently have a car loan, by all means, please use that to rebuild damaged credit.
- Inquiries: 5%. Credit inquiries will hurt your scores… temporarily. Every time you apply for credit, your scores will temporarily drop by a point or two. But it’s only for a few months, and it’s unavoidable especially if you’re applying for a credit car, a new apartment and even a new job.
Other factors, such as judgments, liens and collections will also weigh on your credit scores. But as those age, their impact will be less pronounced.
What Does Your FICO Score Mean?
FICO scores range from 300 to 850, and according to FICO, the median American credit score is 723. If you don’t have a FICO score, it means that you have absolutely nothing in your credit records.
Note that each of the three major consumer credit reporting agencies will give differing FICO scores, because they don’t use the same data and tools:
- Different records. Each of the credit reporting agencies can have slightly different information in their records. A credit card company may report to two credit bureaus but not the third; or one credit bureau may report an account close, while the others may not be updated. These small differences will obviously affect your credit score.
- Different FICO scoring. As mentioned above, TransUnion, Experian and Equifax use slightly different scoring systems — all of which, however, use the same “core” FICO scoring algorithm.
In most cases, the three FICO scores will be in the same basic range. If there is a wide discrepancy, many creditors and lenders will concentrate on the median score.
Each creditor and lender will also view the scores a little differently. They also set the minimum FICO scores they will accept for certain financial products.
In many cases, they will accept a lower FICO score, but with certain conditions and restrictions. For example, some phone companies will require a deposit for people with really damaged credit.
The following chart is a quick rule of thumb for credit scores.
- A credit. Most creditors look at 720+ FICO scores as A credit, although some will go lower or require higher.
- B Credit. Most creditors look at 620-719 range as B credit, although some will go lower or require higher than the range limits.
- C Credit. Most creditors look at 520-619 range as C credit, although some will go lower or require higher than the range limits.
- D Credit. Most creditors look at anything below 520 to be severely damaged credit. If you have a recent bankruptcy or foreclosure, you can expect your scores to be in the low 400s.
Again, this is a rule of thumb. Each creditor and lender will grade your scores differently, and their guidelines will change depending on the market and economic climate.
The thing to remember is that regardless of where your credit score is today, you have the opportunity, resources and right to rebuild your credit. At CreditRehab411, we want to provide consumers ready to rebuild their financial lives with the credit repair information and resources they need to do so quickly and efficiently.