Much like a report card reflects academic performance, a credit score reflects personal financial performance. A credit score is your financial grade point average and is calculated based on a number of variables from your financial history. Credit scores are designed to measure a level of risk of potential default on the part of borrowers. The industry standard in computing such measures is the FICO score, developed by the Fair Isaac Corp.
Determining your credit score
In addition to the FICO score, each of the three major credit report agencies have proprietary scoring mechanisms with trademarked names such as Equifax's BEACON, TransUnion's EMPIRICA, and Experian's Fair Isaac risk score. While each scoring mechanism differs somewhat, Fair Isaac developed the information used and the weighting assigned to each component.
The exact formulas for calculating credit scores are not published, but Fair Isaac has released a general averaged guideline for interpreting what constitutes the score. In general, the score is calculated as follows:
|35 percent is based on your payment history (paid as agreed, delinquencies, etc.),|
|30 percent is based on outstanding debt and the types of accounts carrying balances,|
|15 percent is based on the length of time you've had credit or credit activity,|
|10 percent is based on the number of inquiries on your report, and|
|10 percent is based on the types of credit you currently have.|
So, what's your financial GPA? Click on the related link to find out more about how credit scores affect the cost of credit.
By Claire Loup, economic and financial education representative, New Orleans Branch