Credit Report and Credit Score Analysis - Page 5

Calculation of Credit Scores (cont'd)

Utilization of Credit: The models here take into account the total amount of lines of credit that the borrower has opened against his name and also the amount of the actual line that he had drawn down and is being reflected in the outstanding balance on the account.  Clearly the more accounts a borrower has open with lines drawn down the more it will impact his credit negatively.  It is  recommend that if you are getting ready for a business loan you should order your own credit report at least 3 months ahead of time and get a good look at all items that are being reported.  If you find that you have one credit card that is close to be ‘maxed out’, in order words it has a balance outstanding of almost the entire credit limit, you should transfer some of those balances to other cards.  Lenders do not like to see lines being used close the maximum limit.  As a general rule it is recommend that no more than 65% of each credit line be used.  The ratio that lenders look at when studying your credit report is revolving debt to limit ratio – that is the total debt you have outstanding compared to what is available to you.   

Recent Credit Inquiries: Credit Scoring models also take a look at how many times inquiries have been made against your credit bureau.  This indicates the number of occasions that you have attempted to obtain credit.  Inquiries in the past one year are given much more importance.  It is important to note that there are inquiries that count towards your credit score and those that do not.  Inquiries that count towards your credit score are those that are initiated when you apply for credit and authorize a credit report to be run.  Other inquiries which are checks made by businesses to offer you goods and services like pre-approved credit cards are not counted towards your FICO®.  Inquiries made by lenders and companies with whom you have existing business and who may from time to time request credit information on you to make sure that all is well are also not counted towards your credit scores.  Your credit scores are not affected when you look into your own credit and order a credit report on yourself.  All three repositories offer one free credit report per year to everybody who requests it of them and it is often a good idea to keep on top of your credit and make sure that there isn’t any unauthorized activity going on.

Of the five types of information used to calculate a FICO® score at any given point in time the attached chart will show the weight given to each type of information when calculating a total FICO® score.  These percentages are based on the importance of the five categories for the general population.

For particular groups, such as people with relatively short credit histories, the importance of the categories may differ.  Inquiries are a subset of the "new credit" category shown above, which accounts for 10% of the total FICO® score. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. What's important is the mix of information, which varies from person to person, and for any one person over time.  For more detailed information please contact www.fairisaac.com

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