Your FICO® score is a numerical evaluation of your present creditworthiness. The credit score is compiled directly from both the positive and negative entries in your credit report. The score is divided into five categories, allocated as follows:

• Type of credit you use = 10 percent
• Your credit history = 35 percent
• Amount you currently owe = 30 percent
• Length of your credit history = 15 percent
• New credit obtained = 10 percent
  

Equifax’s scoring system ranges between 300 and 850 points; TransUnion’s between 150 and 934; Experian’s 340 to 820. For example, under Experian’s Beacon scoring system, a FICO® score of:

• 340-600 = highest risk to the lender (lowest score)
• 601-660 = medium-high risk
• 661-720 = medium risk
• 721-780 = medium-low risk
• 781-850 = lowest risk (highest score)

Together with your numerical FICO® credit score, you will also receive a national percentile ranking which reflects the percent- age of the US population with credit scores higher or lower than yours. For example, an Experian credit score of 800 places you into the 92 percentile. Eight percent of the population has higher scores, and 92 percent are lower.

A higher score, of course, indicates a lower potential delinquency rate – or the rate at which 100 borrowers in a specific range will default on a loan, declare bankruptcy or fall 90 or more days behind in payment. Thus, a delinquency rate of 50 percent means that for every 100 borrowers, 50 will represent one or more credit problems.

Credit experts agree that a 720 FICO® score is necessary to be considered a good credit risk. A lower score may cause you either to be denied credit, or your credit will be on less favorable terms. If you follow the recommendations in this book, you should increase your score at least by 50-100 points.