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Credit Scores

Developed by Fair Isaac Corporation (FICO), your FICO® Score is a mathematical equation which attempts to
determine your credit worthiness. 90% of all loaning institutions use FICO. Scores range from 300—850 and the
higher your score, the more likely a bank or business will extend you a credit. Individuals with scores above 700 on
the FICO scale tend to receive the most favorable interest rates. Below 700, businesses and banks may not issue you
a credit card, or if they do, you may be subjected to higher interest rates and perhaps collateral.

Your entire credit history funnels through “Credit Reporting Agencies” such as Equifax, Experian and TranUnion.
The data from your credit history is grouped into five categories as outlined below. The percentages in the chart
reflect how important each of the categories is in determining how your FICO®Score is calculated. Your FICO®
Score considers both positive and negative information in your credit report. Late payments will lower your FICO®
Score, but establishing or re-establishing a good track
record of making payments on time will raise your score.

How a FICO® Score breaks down:

These percentages are based on the importance of the
five categories for the general population.

For particular
groups—for example, people who have not been using
credit long—the relative importance of these categories
may be different.

 

Payment History (35%)

The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the
most important factors in a FICO® Score. How is your credit score calculated from payment history?

Amounts Owed (30%)

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a
lower FICO® Score. How is credit score calculated from amount owed?

Length of Credit History (15%)

A longer credit history usually increases your FICO® Score. However, a short credit history may minimally impact
your FICO® Score if the other categories reflect well. Community Forum: Calculating average account age?
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Types of Credit in use (10%)

The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and
mortgage loans. How is your credit score calculated from types of credit in use?

New Credit (10%)

Research shows that opening several credit accounts in a short period of time represents a greater risk—especially
for people who don’t have a long credit history. How is your credit score calculated from new credit?

 

Your Credit Report

A credit report includes information on where you live, how you pay your bills, and whether you’ve been sued or
have filed for bankruptcy. Nationwide credit reporting companies sell the information in your report to creditors,
insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment,
or renting a home.

The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax,
Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12
months.

Here are the details about your rights under the FCRA, which established the free annual credit report program.
http://www.consumer.ftc.gov/articles/0155-free-credit-reports

Where can I get a copy of my free credit report?
https://www.annualcreditreport.com/index.action

Components of Credit

Types of Credit: All credit is not created equal. There are several forms of credit available such as secured,
unsecured, revolving and installment. Getting familiar with credit types can help you become a better credit
consumer, so click below to get more information.

http://www.dummies.com/how-to/content/get-to-know-types-of-credit.html

Types of Interest: Regardless of the type of credit you choose, all of them charge interest if a balance is due.
Which is worse: simple interest or compounded interest? Which one applies to your car payment or credit card
balance? Not sure? Click on the link below to find out.
http://www.dummies.com/how-to/content/types-of-interest-available-for-business-loans.html

Annual Percentage Rate (APR): A common error that many people make is confusing the interest rate with the
annual percentage rate or APR. The interest rate is simply the amount of money or interest charged on a remaining
principle balance. On the other hand, APR combines the interest plus any additional charges or fees and projects
to arrive at the actual cost of having a loan. The APR is always higher than the stated interest rate. For instance,
if a credit card charges 15% interest on unpaid balance that is the “interest rate”. If the credit card has a $100
annual fee, this amount plus any interest paid during the year becomes the “APR”. Another example of a fee that is
included in the APR is the origination fee (usually 1%) on your student loan. Click on the link below to see more
examples:
http://home.howstuffworks.com/real-estate/mortgage7.htm

Types of Loans: Life happens quickly and before you know, decisions about buying a house or a second car; even
perhaps financing your child’s education will be yours to make. So, what are the types of loans and how are they
financed? Here’s some more homework!
http://www.debt.org/credit/loans/