Each bureau uses a modified version of the Fair Isaacs scoring method. Equifax has the BEACON system, Experian has the Experian/Fair Isaac Risk System, and TransUnion has the classic FICO Risk Score system.
It is important to know that each bureau uses a slightly different scoring method because scores will be different. They all weigh the report about the same as far as what is important and what is less important. Credit scores typically range from 300 to 850. Anything below 600 is considered high risk and a score of about 720 is great with the best rates available.
Understanding how much weight is put on late payments versus inquiries is helpful when trying to maximize your credit score.
- 35% of your score is based on your payment history. It makes sense that the most emphasis is placed on if your payments have been on time since lenders think if you are late with other payments you may be late with theirs.
- 30% is based on outstanding debt. If you have a couple car loans, a mortgage, and several maxed out credit cards a lender will worry that you are on the verge of bankruptcy. On the other hand if your balances are all less than 50% of the available credit, lenders will see you are responsible and will be more willing to extend you credit.
- 15% of the score is based on the length of time you’ve had credit. The longer a line of credit has been open the better it is for you. This is why it can hurt your credit if you cancel that credit card you have had for years.
- 10% of your score is based on new credit. Opening new credit accounts will hurt your overall score. Inquires are also included in this category. Hard inquires from lenders will hurt your score while soft inquires from you will not.
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As you can see 65% of your score is based on making your payments and your percentage of available credit so it is very important to keep an eye on these.
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