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It seems like Fair Isaac and Vantage Score hold their credit scoring formulas as a close secret much like the formula for Coca-Cola or your grandma’s legendary double chocolate-chip cookies. This can be very frustrating for consumers when they see remarks on the credit report like “too many revolving debt accounts” and not knowing exactly that means.
Fortunately, Fair Isaac and Vantage Score have issued some public information about how they calculate credit scores. Let’s take a look at the various factors:
Payment History:
The top rated factor for both models is payment history. This is because lenders want to know a person’s payment history–past and present. This category can be broken down into three subcategories:
- Recency – This is the last time a payment was late. The more time that passes the better.
- Frequency – One late payment looks a heck of a lot better than a dozen.
- Severity – The “Hierarchy of madness” so to speak, rest on the logic that a payment 30 days late is not as serious as a payment 60 or 120-days late. Collections, tax liens, foreclosures, repossessions, charge-offs and bankruptcies are credit score killers.
How much is owed:
The score looks at the total amount owed on all accounts as well as how much you owe on different types of accounts (mortgage, auto, etc). Using a higher percentage of the credit limits will worry lenders and hurt the credit score. People who max out their limits have a much greater risk of default.
Utilization:
When it comes to revolving debt-credit cards, the formula looks at the difference between the high limit and balances. For Example, let’s say your customer has a MasterCard with a credit limit of $10,000 and they have spent $2,000 of it. This is a 20% utilization ratio. The lower the ratio, the higher the credit score. So, if your client’s are looking for a quick credit score boost, have them pay down any accounts they can. Don’t expect this to be instantaneous as it can take up to 45 days for the credit bureaus to update reports.
One more important tidbit, CLOSED ACCOUNTS do not help and can hurt if there is a balance remaining. Therefore, tell clients not to close accounts. A long perpetuated myth has been to close accounts that are not in use but this will hurt consumers in several ways. As you now know, overall and individual account utilization plays a major role in credit scoring- if consumers close old accounts, their overall utilization rate will increase which will cause their score to decrease. In today’s tightening credit markets the availability of credit has drastically changed, having accounts that have been established will serve as a “Safety Net” if the consumer finds themselves in need of some emergency funds.
Length of credit history / Depth of credit:
This is less important than the previous factors, but it still matters. It considers (1) the age of the oldest account and (2) the average age of all your accounts. It is possible to have a good score with a short history, but typically the longer the better. Young people, students, and others can still have high credit scores as long as the other factors are positive. If a person is new to credit then there is little they can do to improve a credit score. The only solution is to open an account and be patient.
Average age of accounts is another important reason to keep all accounts open. If a consumer has multiple accounts that they’ve had for some time but don’t use- they are still benefiting from … (continue reading How the Credit Score is Calculated by Disputesuite.com)
