- The Washington Times - Friday, October 13, 2000

We've been hearing about credit scores for years, but no one was quite sure how they worked. Fair Isaac and Co. (Fico) in California created the concept of credit scores and devised a formula to determine them.
Also for years, no one but the mortgage practitioners was given access to these secretive numbers. An outcry from the public and on-line mortgage service providers forced Fico to release its hidden formulas and explain to the public how credit scores are tabulated.
For detailed information, glide by www.fairisaac.com and follow the links to Consumer Info and Credit Scores. The company has done a fine job of explaining what consumers should watch in their credit habits to keep the score as high as possible.
(Your credit score is a snapshot of your credit-risk picture at a particular point in time. Lenders use the score to determine whether your credit habits are low-risk enough for them to lend you money.)
The descriptions below of how Fico determines credit scores seem pretty reasonable at first glance, so why all the secrecy? Well, the folks at Fico always have held that if the consumer knew how the score was tabulated, then the consumer could manipulate the score by changing habits, thus reflecting an untrue score.
Now that Fico has released the secret code, time should tell if its fears were founded.
The mystery is unveiled here is how your score is determined.
Payment history
Fico first looks at how you pay off your debts. This information accounts for 35 percent of the credit score. It looks at:
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, debts that have been referred to a collection agency (known as collection items). and/or past-due items.)
Severity of delinquency (how long the items are past due).
Amount past due on delinquent accounts or collection items.
Length of time or recentness of past-due items, adverse public records or collection items.
Number of past-due items on file.
Number of accounts paid as agreed.
Amount of credit owed
Next, outstanding debt is considered and makes up about 30 percent of the credit score. Variables examined include:
Amount owed 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 owed (proportion of balance to original loan amount on certain types of installment loans).
Length of time
credit established
How long you have had credit accounts for about 15 percent of your credit score and includes:
Time since accounts opened.
Time since accounts opened, by specific type of account.
Time since account activity.
Search for new credit
New credit also affects your credit score. This accounts for about 10 percent of your score.
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 openings, by type of account.
Time since credit inquiries.
Re-establishment of positive credit history following past payment problems.
Types of credit established
Finally, Fico considers the type of credit you hold, accounting for about 10 percent of your credit score.
Number of various types of accounts.
Basically, the Fico score reflects how much debt you have (is it too much compared to your income?); whether you make payments on time; how many accounts are open; and, if you have run into credit problems, how long it took you to fix them and how you did it.
The mystery isn't so mysterious. Controlling your debt level, limiting the number of accounts and making payments on time always has been the sound advice of financial planners and credit counselors.
M. Anthony Carr has written about real estate issues for 11 years. Direct your comments to 8411 Arlington Blvd., Fairfax Va. 22031; or by e-mail to [email protected]

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