How Your Credit Score is Derived

To continue with our discussion on Credit Scores, it is always important to understand the basic ways your score is calculated. Many factors determine the complex process including whether you pay your bills on time, the length of your credit history, and whether you even have a record of credit. Scores are pulled from each of the three Credit Bureaus and reflect your credit history over the last 24 months. The goal of the report is to provide lenders with a future forecast on how you will manage your debt. Lenders typically pull what is called a “Tri-merge“, a quick snapshot of all three companies, that shows each FICO score. Yes, you can have a different score for each reporting bureau, as they each have different computing formulas. (My last report showed a range of 750-815.) So in this case the bank looks at all three and usually either takes an average, or goes with the middle number.

Important Tip: If your lender is pulling a Tri-merge, ask them for a copy. They are charging you for it so you should get a copy no matter what.

With all the confusion that three bureaus create, they have finally decided to work together and make it easier on the consumer. In 2006, the concept called Vantage Score was born and is intended to standardize the scoring system. Since this new system is so new, it will probably take a few years before lenders catch on.

Items that can affect your score are foreclosures and bankruptcies (remain on history for 7-10 years), late payments on mortgages and credit cards, repossessions, length of credit history (better to have had a credit card for 5 years than 1 year), just to name a few. It is possible to get your credit back on track. Review your report and check for mistakes. Look for outdated data, paid off loans that are listed as being due, and credit cards that are not yours. It does happen that other peoples problems are accidentally listed as yours.

(See the graph to the left on how the FICO score is broken down.)

Important Tip: Do not be afraid to call a creditor and ask to have a derogatory comment removed from your history. I did this for a credit card company, and since it had been reported for 2 years, they said they had no problem sending a notice to the bureau to have it removed.

Look for the final installment, How to Raise Your Score, next week.

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