How Are My Credit Scores Calculated?

The computer model that generates the calculation of each person’s credit score was designed and is still driven by the Fair Isaac Company. This has been nick named “FICO” for Fair Isaac Co. That is why you will often hear your score referred to as your FICO score. The entire computer software that contains the calculations is owned by Experian and has been shared with Transunion and Equifax. Thus all three are using the same computer model. These are the three “data banks” for credit histories in the United States and are located in Atlanta, Georgia (Equifax), Chester, Pennsylvania (Transunion), and Allen, Texas (Experian) and represent all the credit gathering processes in the United States.

How is the information gathered?
Each time you complete a simple application from a store like Penny’s or Sears, for instance, that information is passed on to the three data banks. Your address, job information, S.S. number, birth date and home phone number are all recorded in the three data banks.

Then every month that credit card company reports at their own expense your payment record, your highest credit limit, terms of your financing including payment, and your current balance. This is automatically loaded into your data and is reflected on your report.This naturally happens with Master Card, Visa, student loans, car payments, home mortgages, equity lines, and so forth.

How is my credit score actually calculated?
Well, now you are “getting personal” as they say. In my meeting with FICO several years ago, they were quite secretive about actually how they weight each factor in their scoring. I guess they thought that I might try to manipulate the credit to improve your score if I knew “how” they did everything. I still wonder how they knew that.

Your credit information is loaded into the computer model and a credit score is calculated from each of the three data banks. Thus, you will have three scores when we run your credit report. We will always use the mathematical “middle” score for our underwriting of your loan. Today, and in the next couple articles, I will give you many hints about what impacts your score and how much it impacts it.

However, today just I’ll share just a few hints that might surprise you as you work to understand your credit score and improve it.

• Obviously, make all your payments on time. Some creditinstitutions are quicker to “ding” your account with a 30day late that others (Capital One is the worst), but keepthose payments coming on time.
• Don’t assume that if you make a double payment they will credit your next month payment. It WON’T happen and you will end up with a 30 day late if you do not make the next month’s payment.
• Keep your credit balances on revolving cards below 50% of your highest credit limit and below 30% if you can. Even if all your payments are on time your credit score will be negatively affected if you are over 30% and more so if you are over 50% of your credit limit. And, you never want to go over your highest credit limit. Your scores will come down many points if any of the above happens. I can’t predict exactly (remember, they won’t tell us), but we know it happens

• The typical 3/1, 5/1, 7/1 and 10/1 fixed/adjustable loan programs will usually offer an interest only feature qualifying at the lower interest only payment. Remember that these loans are fixed for the first three to ten years, then become adjustable. Therefore, the loan becomes fully amortized over the remaining term after the fixed rate period.
• The second and quite popular program is the 30 year fixed rate loan. It is interest only payments for the first ten years. Then, the balance is amortized over the remaining 20 years of the 30 year term. Since you can pay down the loan amount at any time during the first ten years (and watch your payment come down the following month) you can request from me a simple calculation near the end of the ten year period to plan your final 20 year payment schedule to meet your budget. Again, you are in control of your mortgage planning with a program that grants you considerable flexibility.

I will be sharing MUCH more in future articles about how to improve your credit score. I think this is enough to digest for one day!

Peter M. Galde is the founder and principal at Cornerstone Capital Funding, 14500 Mono Way, Suite 110, Sonora Ca. 95370. Peter has 28 years experience in the finance industry. E mail Peter or call him on 209 532 7711 for further information.