Credit Scoring Models

According the Public Broadcasting Service, credit scoring models did not exist before the 1970s. Instead, lenders and loan officers used personal judgment, such as a person's appearance, job, street address, etc. when assessing a loan application. Unfortunately, human judgment is not nearly as reliable as a mathematical model based on verified data in determining credit risk.

Fair Isaac Corporation (FICO) is the creator of the most widely used credit scoring model. The calculation of the actual FICO score is a closely guarded secret, but the Fair Isaac Corporation offers a general idea of how it works.  Payment history, such as late and on-time payments, makes up 35 percent of the score.  The amount owed, which includes the number of accounts, makes up 30 percent.  According to FICO, length of credit history, new credit accounts and the types of credit accounts used make up the remaining 35 percent.

Those with more than one type of debt will generally have a higher score than those with only one type.  For example, a mix of installment and revolving debt will show you can manage a car payment and credit card debt, resulting in a higher credit score.

Each of the three primary credit bureaus, Experian, TransUnion, and Equifax, scores your credit differently.  You need to know all three of your scores in order to know where you stand.  Lenders use all three credit scores to assess a person's credit worthiness.  Knowing all three of your credit scores puts you in a better position to negotiate the best rates possible.

Please visit the following Federal Trade Commission web site to learn how you can request a free copy of your credit report from each of the three primary credit bureaus once a year:  There are small fees if you would like to see your actual credit scores.

Here are some suggestions for improving your credit scores:

Monitor your credit reports and correct errors.

Look not only for negative events on your record, but also examine the credit limits to make sure they're accurate. If the credit limits appear lower on the report than they actually are, that has the potential to hurt your score.

Pay bills on time and keep card balances low

Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit to which you have access, are important components of your score. Your credit score will be adversely affected if the reported balance on one or more of your cards is near the account's limit.

Take on new credit only when you need it

Some credit cards come with great offers, including a percentage off your bill if you sign up for one at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile.  Taking on additional credit could end up hurting your score.

As always, talk to your loan officer or credit professional PRIOR TO making changes which may affect your credit to ensure you’re making the right choice to increase your credit scores.