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The Components of Credit Scores

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Presentation Summary: Learners will be informed of the components that make up their FICO credit scores and the factors that contribute to these components. Learners will come away with actionable steps they can take to improve their credit scores.

Created by Richard Thripp and presented on 4/27/2016 at Port Orange Toastmasters to fulfill Project 1: The Technical Briefing from the Technical Presentations manual in the Toastmasters Advanced Communication Series.

The word belvedere was incorporated into slide 16 because it was the Word of the Day selected by the WordMaster at the 4/27/2016 meeting of Port Orange Toastmasters.

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The Components of Credit Scores

  1. 1. The Components of Credit Scores BY RICHARD THRIPP APRIL 27, 2016 PRESENTED IN FULFILLMENT OF: TOASTMASTERS ADVANCED COMMUNICATION SERIES TECHNICAL PRESENTATIONS PROJECT 1: THE TECHNICAL BRIEFING
  2. 2. What are Credit Scores?
  3. 3. What are credit scores? • Scores based on your credit reports • Used when considering you for new credit cards, mortgages, and auto loans • A factor in decisions by some employers, landlords, banks, and auto insurance companies
  4. 4. Who maintains credit reports? • Three credit bureaus: • Equifax • Experian • TransUnion • Reports and FICO scores may differ between bureaus
  5. 5. What is a FICO score? • A credit scoring model developed in 1989 by Fair, Isaac, & Co. • Calculated from credit report(s) • Range: 300–850; 700+ is “good” • Typically cannot be obtained for free
  6. 6. Components of Credit Scores
  7. 7. Payment History 35% Utilization 30% Average Age of Accounts 15% Mix of Credit Types 10% New Credit 10% COMPONENTS OF FICO CREDIT SCORES What does this mean? Most important: Payment History and Utilization—65% Don’t miss payments! Rule of thumb: use less than 30% of your available credit lines.
  8. 8. Payment History—35% • Includes personal credit cards, mortgages, auto loans, and student loans • Excludes all other bills unless delinquent and referred to collections • Paying just the minimum payment on a credit card is exactly the same as paying in full for the purposes of this component • Being more than 90 days late is very bad
  9. 9. Utilization—30% • How much of your credit lines are you using? • Lower utilization (below 30%) = better • Only relevant to credit cards • Usually based on statement balances • High impact and can change frequently • Looks at total credit usage and individual credit lines, to some extent
  10. 10. Average Age of Accounts—15% • Includes your oldest account and the average (mean) age of all your accounts • Most relevant to credit cards • Older = better • Don’t cancel credit cards if no annual fee
  11. 11. Mix of Credit Types—10% • Your credit score improves mildly if you have a mix of credit cards, mortgages, auto loans, and student loans • You can still have a great score (e.g., high 700s) with credit cards alone
  12. 12. New Credit—10% • “Hard” credit inquiries occur when you are applying for credit • Creditors might inquire at 1–3 bureau(s) • These inquiries mildly hurt your scores for about 6 months and disappear after 2 years • Avoid applying for credit cards for 6–12 months before getting/refinancing a mortgage
  13. 13. What’s missing from FICO scores? • Job, income, employment history • Utility bills and rent payments • Assets and credit limits • However, credit limits and employment may be on your credit reports (based on your prior self-reports) and often factor into credit issuance decisions
  14. 14. Concluding Thoughts
  15. 15. FICO and “FAKO” scores • The FICO “classic” score was described here and is the most widely used score, but there are others such as FICO mortgage and auto scores, which are infrequently used • Credit Karma, Credit Sesame, and others usually provide “FAKO” scores which may not match your FICO scores
  16. 16. Building your credit belvedere • A belvedere is an Italian term meaning “beautiful sight” and also can refer to an overlook point similar to a watchtower • Build your credit belvedere by being informed • Request your free credit report from www.AnnualCreditReport.com • Know your interest rates, terms, and balances Plan ahead

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