What is a Credit Score?
The credit score represents the lending risk factor. The FICO score range is 300 to 850.
Although the credit score is just a 3 digit number, it is the result of an algorithm that predicts the statistical chance of a consumer going 90 days late or more on a particular loan obligation over the next 24 months.
• Above 800 = there is a 1 in 1,485 chance a consumer will go 90 days late on a loan obligation
• 720-799 = 1 in 649 chance
• 680-719 = 1 in 112 chance
• 620-679 = 1 in 47 chance
• Below 620 = 1 in 15 chance
Today, a 740 is considered a "prime" credit score by most lenders. With this in mind, a better credit score means less risk to the lender, which can often lead to better rates on loans and credit cards for the consumer.
Here is a percentage breakdown of a FICO score:
35% - Payment History
30% - Credit Utilization
15% - Length of Credit History
10% - Types of Credit
10% - Number of Credit Inquiries
Most people are aware of the three credit reporting agencies TransUnion, Equifax and Experian. The average difference in score between the highest and lowest of your three FICO scores is 60 points. This is the result of each of the credit bureaus having different items on their report; some correct, some incorrect and some that are not being reported in full compliance with credit law. According to the Government Accountability Office, 80-90% of credit reports have serious errors on them, so be sure to check your report frequently.
How long can negative items remain on the credit report?
• Late Payments (30–180 days) can stay on your credit report 7 years from the date of the initial missed payment. It will have the biggest blow on the credit score at first and then have less of an impact as the late payment ages.
• Collection Accounts can remain on the credit report 7 years from the date of the initial missed payment that led to the collection (the original delinquency date). When a collection account is paid in full, it will be marked "paid collection" on the credit report.
Many consumers believe that once an unpaid collection reaches 7 years, the collection will fall off the credit report and they will no longer owe the debt. This is not true. The account may no longer report, but the debt is still owed. Once a debt is owed it is the client's responsibility until it is paid. The consumer must keep in mind that unpaid collection accounts may be sold to a different collection company and they may start reporting the account again to the credit bureaus.
• Charged-off Accounts can remain 7 years from the date of the initial missed payment that led to the charge-off (the original delinquency date), even if payments are later made on the charged-off account.
• Closed Accounts may or may not have a zero balance. Closed accounts with delinquencies remain seven years from the date they are reported closed, whether closed by the creditor or by the consumer; however, delinquency notations will be removed seven years after the delinquency occurred when pertaining to late payments.
• Bankruptcies: A Chapter 7 Bankruptcy can remain for ten years from the filing date. Chapter 13 remains seven years from the filing date. Accounts that were included in bankruptcy will remain seven years from the date they were reported as included in the bankruptcy.
• Judgments (paid or unpaid) can remain on the credit report 7 years from the date the judgment is filed.
• City, county, state, and federal tax liens (unpaid) can remain 15 years from the filing date. Paid tax liens can remain 7 years from the paid date of the lien.
• Inquiries can remain on the credit report for 2 years; however, only those inquiries in the last 90 days have the greatest impact on the credit score. Some inquiries, such as employment or pre-approved offers of credit, will show only on a personal credit report pulled by you. The credit score does allow for "rate shopping". Example; mortgage, auto and student loan inquiries count as 1 inquiry if multiple inquiries are done within a 30 day period.