Ever wonder how they calculate your credit score?
July 6, 2008
I monitor my credit score regularly. While I wouldn’t say that I live in fear of identity theft, I am aware of it, and would like to avoid it. Carrie has had some problems just because there is another Carrie Martin in Tacoma with her same birthday who is not a fine, upstanding citizen with good credit.
The scoring method has been shrouded in mystery and I have always been intrigued by the process. (You know I love to know how things work!)
Ron at the Wisdom Journal (a great blog that I have repeatedly suggested you should investigate) has a great article that is an interview of a FICO expert that explains this stuff in simple terms for those of us who weren’t finance or economics majors.
I recently had the great pleasure and honor to conduct an email interview with Barry Paperno from www.myFICO.com. Barry is an expert in the field of credit scoring. My questions were selected from things I personally wondered about, as well as some questions I’ve been asked by readers in the past. Here is the interview in its entirety.
1. What EXACTLY is a “credit score?”
A credit score is a number that summarizes your credit risk based on a snapshot of your credit report as of a particular point in time. The credit score that matters is the “FICO” credit score, developed by Fair Isaac Corporation and most commonly used by lenders, which uses a range of 300-850 with the higher the score, the lower the risk.
2. What are the components of a credit score? (what information is evaluated and how is that information weighted?)
The five main categories of information that FICO scores evaluate, followed by their estimated weights, are:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
It’s a great interview. Read it all here.
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