|
|
Understanding Your Credit Score
What does your score mean?
This rating system is meant to develop a snapshot of the
risk you currently represent to a lender. Several parameters in your credit
file, including length of credit history, number of open accounts, loans,
mortgages, public records, and others are formulated to produce a
three-digit score between about 300 and 950. There are other scores used by
lenders and insurance companies (some of which are developed by FICO) such
as Application and Behavior scores. These other scores take other
information into account. Usually a lender will use a combination of your
credit score with other factors when determining your risk. They all have
the same objective, to determine the borrower's potential risk. Regardless
of whether the score was generated by FICO or a system based on FICO
parameters, they all yield an industry standard three-digit score. This
score places the borrower in one of three main categories (we named the
third one ourselves.)
Prime, sub-prime and shafted
Prime: If your credit score is above 680, you are
considered a "prime borrower" and will have no problem getting a good
interest rate on your home loan, car loan, or credit card.
Sub-Prime: If your credit score is below 680, you are "sub prime" and
will likely pay a much higher interest rate on your loan.
Shafted: Below 560 is the shafted score. At least that is how most
lenders and credit issuers perceive it. You can still get a credit card but
you will likely be hit with a security deposit or high acquisition fee. In
addition to that your interest rate will likely be 22 to 23%. You can forget
about most home loans and the majority of new car loans at this score. Below
560 is no place to be. You will pay much, much more in higher interest and
unnecessary fees. You may even pay more for your insurance rates. A very low
score can even prevent you from getting a job with many companies. If you're
in this category
Click here
How are credit scores calculated?
The methods of calculating your FICO may differ slightly
depending on the credit bureau. When obtaining your score from one of the
Credit Bureaus it is important to understand that your score does not come
directly from FICO. It is adapted to each bureau and is given its own name:
Equifax uses "Beacon", Trans Union uses "Empirica", and Experian uses
"Experian/Fair Isaac." These scores are also referred to as your "Bureau
Scores."
Since your score is derived from your bureau data, it will change every time
your reports change. However your score is calculated, it will always take
into consideration many categories of information. No one piece of
information or factor determines your score. As the information in your
credit report changes, the importance of one or several factors may change
in your FICO score. Lenders look at many things when making a credit
decision, including your income and the kind of credit you are applying for.
However, your FICO score does not reflect these facts as it only evaluates
the information retained by the credit reporting agency.
Click to
Learn More
What factors affect your credit score?
There are five factors which are used in credit scoring
calculations that determine your overall credit score.
-
Previous Credit Performance (Payment History) 35% A lender wants to
know what your payment history is like. Have you paid everything on
time, are you late on anything now, and so on. Your payment history is
just one piece of information used in calculating your score, although
it can be the very important.
-
Current Level of Indebtedness (Amount Owed) 30% How much is too
much? Can the borrower pay me and still afford to pay his other bills?
Not necessarily. Having available credit can actually help your ratio of
debt to available credit. These are the types of questions that most
borrowers want to know and the answers are almost as important as your
previous credit history.
-
Amount
of Time Credit Has Been In Use (Length of Credit) 15% Generally
speaking, the longer the credit history the better your score. However,
this factor only makes up 15% of your total score so even young people,
students or others with short histories can still score high overall as
long as the other factors show good. If you are new to credit than there
is little you can do to improve this part of your score. Open an account
and be patient.
-
Pursuit of New Credit (10%) Credit is much more popular today. Just
look at the number of credit card offers you get via the Internet and in
the mail. Consumers can now shop for credit and find the best terms to
meet their needs. Each time someone runs a credit check on you, it
creates an inquiry. Fair Isaac has changed some of its
calculations to account for these new trends. Specifically, they treat a
group of inquiries - which probably represents a search for the best
rate on a single loan - as though it was a single inquiry (note: this
only applies to auto or mortgage loan inquiries.) For example, auto loan
inquires that are within 14 days of each other only count as one
inquiry.
-
Types of Credit Experience (10%) A healthy mix
of different types of credit, installment loans, retail accounts, credit
cards, and mortgage. This score is not normally a key factor in
determining your score but it can help a close score. Its not a good
idea to try and open different types of accounts just to try and make
this factor better. It will likely reduce your score in other areas. You
should never open accounts you don't intend to use anyway.
What type of accounts you have, and how many, can make a big difference.
The optimal ratio of installment versus revolving accounts depends on
your profile and differs from person to person. One factor that seems to
have significant influence is your percent of open installment loans.
Too many can lower this portion of your score.
Improving your credit score
Now that you know how your score is calculated, you can
begin making changes to your current financial planning. The best things you
can do are simple.
-
Pay your
bills on time. Sounds simple, but this is the biggest thing you can do
to keep your score high. Delinquent payments and collections have a
major negative impact on a score.
-
Keep your
balances low on unsecured revolving debt like credit cards. High
outstanding balances can affect a score.
-
The
amount of your unused credit is an important factor in calculating your
score. You should only apply for credit that you need.
-
Make sure
the information in your credit report is correct. If its not, dispute it
with the credit agencies and/or with the creditor directly.
-
Removing
negative items on your credit reports has the biggest impact on your
FICO score. Generally, negative items stay on your reports for seven
years but you can hire a professional credit report repair service such
as
Lexington Law Firm
to do it for you.
-
You can
try to understand the laws and your self, but we have found it's so much
easier to have someone do it for you. We strongly recommend using
Lexington Law Firm, they are the industry leaders.
|
