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Spring 2007

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What's your financial GPA?

image of report cardMuch 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:

bullet image 35 percent is based on your payment history (paid as agreed, delinquencies, etc.),
bullet image 30 percent is based on outstanding debt and the types of accounts carrying balances,
bullet image 15 percent is based on the length of time you've had credit or credit activity,
bullet image 10 percent is based on the number of inquiries on your report, and
bullet image 10 percent is based on the types of credit you currently have.

Related Links
Fair Isaac's FICO Web site links off-site
Strive for a high score
It is important to remember that as the information in your credit report changes, so does your score. While credit scores are an important factor used by lenders and others to make determinations about you, credit scores are not the only factor considered. The level of importance of the components also changes depending upon what the score is being used to judge. For example, a credit score of 420 may get you approved for a high-interest credit card, but chances are it won't get you approved for a mortgage. Scores range from 300-850, and just like grades, higher is better.

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