What's in a Credit Score?

Credit scores are important. But they've also been somewhat of a mystery to borrowers.

Credit scores are used by lenders as a model to help them determine the likelihood that a borrower will make timely and consistent payments. The model, developed by Marin County, Calif. - based Fair, Isaac and Company, is derived from the long-term analysis of millions of consumers' credit histories. (Credit scores are also called FICO scores, the initials of Fair Isaac and Company.) The predictive model has help up pretty well. A study by Freddie Mac showed only one in 100 borrowers with high scores - above 660 - fell behind in their payments. On the other hand, more than one out of three borrowers with scores below 620 was 60 days late on their mortgage payments.

Although a good credit risk and a truly terrible credit risk have always been easy to spot, credit scoring provides a way to measure the credit worthiness of people who fall in the vast middle. Additionally, with more people than ever taking advantage of low down payment loans of 5 percent or less, it has become imperative for mortgage lenders to use sophisticated models that help them make intelligent underwriting decisions, while approving as many people as possible.

But what determines credit scores continues to be a mystery - to borrowers and lenders alike. Until now.

Fair, Isaac and Co., is taking strides to demystify its FICO scores. Soon, the company says, mortgage applicants will not only be able to obtain their specific score, but will be able to go online to find out what individual factors in their credit profiles are affecting their scores. COOL.

In the interim, Fair, Isaac has released some details in the weight they give to certain aspects of credit history. Some highlights:

● 35 percent of your score is determined by the payment histories on your credit accounts - such as general credit cards, department store cards and car loans. The model assigns greater weight to recently missed payments than any late payments from years ago.

● 30 percent of your score is based on the amounts you currently owe creditors. The statistical model sometimes gives a slightly higher score to people who show an unpaid balance on a credit card of two (but with no late payments) than it would to those who run no balances at all.

● Another 15 percent of the credit score is tied to the length of time you've been a credit user. Simply stated: the longer (assuming you've paid bills on time), the better.

● Approximately 10 percent of the FICO score is based on whether it appears as if you are loading on additional credit. For example, you have applied for (and received) new loans or lines of credit in the recent past? The more you've done so, the lower your score.

● Finally, about 10 percent of the score is based on the type of credit sources you have. For example, a loan from a household finance company, with its higher rates, might be deemed as riskier to pay back for the borrower than a home equity loan from a mortgage banker.

TIPS TO RAISE YOUR SCORE To Protect yourself from a bad credit score, pay down high balances on credit cards and open new credit accounts only if or when you need them.

You might want to obtain copies of your credit report from all three major credit bureaus before you apply for a home loan. Each one may have different information about you and may contain a mistake. If there's an error, make sure the credit report gets corrected. For credit reports call:

EQUIFAX: 800-684-1111

TRANSUNION: 800-888-4213

EXPERIAN: 800-311-4769

Information provided by North American Mortgage Company