Wyoming Business Tips for Aug. 2

A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.

By: Cindy Unger, WSBDC business adviser

“How are those ‘magic’ credit scores compiled?” Mike, Casper

A credit score represents an individual’s creditworthiness -- how likely that person is to pay bills and pay on time.

Banks, phone, utility and insurance companies, landlords, and most other companies that extend any type of credit will check your credit score. The Fair Isaac Corporation (FICO) was the first to take a credit report, detailing how an individual borrows and repays debts, and compile that information into a single three-digit number, known as a credit score. FICO scores are the most widely used, but there are other companies that sell credit scores compiled with different formulas.

When lenders order a credit report, they also can purchase a credit score based on the information in that report. FICO provides its formula to the three credit bureaus: Equifax, Experian and TransUnion. The credit bureaus use that formula to calculate a score from your credit report.

Although the FICO scoring system design is similar across all three credit bureaus, each organization obtains information from a slightly different network of lenders -- meaning that the reports will vary. FICO profits by charging a small royalty for each score the bureaus sell to the lenders.

FICO scoring considers both positive and negative data on your credit report. Late payments will lower your score, but a good track record of making payments on time will raise your score.

The formula groups data on the credit report into five categories whose influence is weighted in terms of importance: Payment history (35 percent); amounts owed (30 percent); length of credit history (15 percent); new credit (10 percent); and types of credit in use (10 percent).

Depending upon your personal financial situation, the importance of these categories may vary. For example, individuals with a shorter credit history will be factored differently than those with a longer credit history. Additionally, as the information in your credit report changes over time, so does the weight of the various factors that determine your FICO score.

Your FICO score will influence the type and amount of credit available, and the terms a lender may offer. Scores range from 300 to 850. The higher the score, the lower the risk. There is no universal “cutoff score.”

While many lenders use FICO scores to help make lending decisions, each lender has their own strategy, with varying levels of risk acceptable for any given credit product. Lenders also will use factors such as your income, length of time at your present job, and the kind of credit you are requesting to make credit and interest rate determinations.

A blog version of this article and an opportunity to post comments are available at http://wyen.biz/blog1/.

The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.