A part of everyday life in the consumer finance industry is dealing in credit and credit scores. We look at our prospective customers in terms of their ability to repay, and nothing measures that ability quite as good as the customer’s credit score. So, what exactly, are the factors that go into formulating the score?

FICO, formerly known as Fair Isaac & Company, is the leading purveyor of the credit score. Approximately 90% of credit decisions are based on the FICO score. Their scale runs from a low of 300 to a high of 850. The bands are as follows:

• 300 to 579 – Poor
• 580 to 669 – Fair
• 670 to 739 – Good
• 740 to 799 – Very Good
• 800 to 850 – Exceptional

So, how can the national credit reporting agencies (Experian™, TransUnion™ and Equifax™) come up with different FICO scores for the same person? To answer that question, let’s take a dive into their rating categories.

Experian™, for example, uses five categories and gives them differing weight:

1. Payment History is weighted at 35%. This category includes number of missed payments, collections, and derogatory public record information. Recent credit card usage factors in here as well. The more frequent the late payment occurrences, the greater the negative impact on the score.
2. Amount of Debt is weighted at 30%. Usage is really important. This may sound counter-intuitive, but if you owe little, have few accounts and a lot of available credit, that may not be a good indicia.
3. Length of Credit History is weighted at 15%. How long accounts have been established, the age of the oldest and newest accounts, and the average age of all accounts factor here.
4. Amount of New Credit is weighted at 10%. The number of new accounts recently opened is a factor. Opening new credit accounts in a short time frame is an indicator of greater credit risk.
5. Credit Mix is weighted at 10%. Examples of types of credit include revolving, bank-issued credit card accounts and installment loans including mortgages. Credit mix becomes important when the agency does not have a lot of other information.

Differences in credit scores from the credit reporting agencies occur from the differences in the “ingredients” and differing weights that they may assign. That is their proprietary information—their secret sauce. Interestingly, there are on-line tutorials that can assist consumers in raising their credit scores by a few points. Sometimes just a few points will result in moving up to a different band.

It is important that each of us, as consumers, know our credit scores, and check them periodically. After all, the better our score, the better our buying power—at least in terms of what creditors are willing to finance at a good rate.

Practice Pointer #1: Check your credit score by clicking Registration (experian.com), Online Personal Credit Reports & Credit Scores - TransUnion Credit Monitoring or Monthly Credit Score & Report | Equifax Core Credit™ | Equifax®.

Practice Pointer #2: For more information from Back To Basics about credit scores and consumer debt, click here.

Please Note: This is the one hundred seventy-third blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.