Factors shaping credit score
Learn the factors that shape your credit score by Eric Tyson
HOUSTON CHRONICLE: ADVICE: PERSONAL FINANCE - July 10, 2005

Lenders generally use a credit scoring system to help them streamline credit-application processing.

The most common credit scoring system by mortgage lenders is the FICO score. FICO is short for the company that developed this system — Fair, Isaac and Company.

FICO scores range from the 300s to the 900s, with most of the scores in the 600s and 700s.

Higher scores mean that the borrower is far more likely to make timely and complete payments when borrowing money. In other words, such borrowers are the types that lenders prefer making loans to and are generally said to be "low risk."

Credit scores such as the FICO score are determined using information in your credit report.

There are three major credit-rating agencies (Equifax, Experian and TransUnion), and you can have a FICO score from each.

Fair, Isaac earlier this year released a list of the factors that are evaluated to determine your FICO score:

1. Your track record with paying prior loans (35% of your FICO score). Clearly, a major factor in a decision to lend you a large sum for buying a home is going to be your track record with repaying other loans. Late payments reduce your credit score, while accounts with no late payments increase your credit score.

2. Your current amount of outstanding debt (30% of your FICO score). All things being equal, the closer you are to maxing out your current lines of credit, including on credit cards, the more total loans you have and the more total dollars you owe, the lower your credit score will be. Lenders have learned over the years that they are less likely to be repaid by those borrowers who are in or close to being in over their heads with debt.

3. The duration of your credit history (15% of your FICO score). Just as we seek long-term experience when selecting someone to manage our investment money for us, a lender would prefer to see a longer track record of success with your use of credit.

4. Recent efforts to obtain more credit (10% of your FICO score). When people begin to struggle financially, they might seek out new loans and more loans to keep afloat. Therefore, your credit score also reflects this activity.

5. The financial healthiness of your credit mix (10% of your FICO score). Lenders know that too much high-interest consumer debt and not enough borrowing to buy investments (such as real estate) that appreciate is financially unhealthy.

Eric Tyson, author of Investing for Dummies and Personal Finance for Dummies, can be reached at eric@erictyson.com.