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| Understanding Your Credit Score |
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Thursday, August 31 2006 @ 05:04 PM Eastern Daylight Time
Contributed by: Admin
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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 your in
this catagory
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.
To learn more
Click Here.
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.
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.
What is a Credit Report?
Whenever you apply for any type of credit or financing,
a credit report is pulled from at least one of the three
major credit bureaus. While there are hundreds of
smaller credit bureaus around the country, virtually
every credit bureau is affiliated with Trans Union,
Experian, or Equifax. These credit bureaus collect and
maintain information on the vast majority of Americans,
but they are not affiliated with the government in any
way. The credit bureaus are for-profit corporations that
sell your personal information for money.
The credit bureaus receive your personal information
through the same lenders who grant you credit. They have
agreements with each of these credit grantors that
require the credit grantor to inform the credit bureaus
of everything that occurs in your relationship with the
credit grantor. If you make a payment late, the negative
credit listing is quickly reported to at least one of
the three major credit bureaus and is added to your
credit history.
Credit reports are not just a record of how you are
currently managing your credit accounts. Credit reports
are histories of everything you are doing with your
credit now, and everything you have done in the past.
The credit bureaus collect this information, list it on
your credit report, and then sell it to credit grantors
who wish to see your credit history before they decide
to lend you money. The credit grantors who review your
credit are especially interested in any negative credit.
If you have shown any tendency to pay late, or to
disregard your financial commitments in the past, then
the creditors' computers will immediately reject your
application. Just like when you were in grade school,
your credit report is your financial report card to the
world.
What Kind of Information Appears on the Credit Report?
Merchant Trade Lines: These include all regular
credit lines such as department store cards, auto loans,
mortgages, and credit cards. If there is any history of
late payment, or if the trade line was included in
bankruptcy, charged off, or put into repossession, the
listing will be considered negative by all credit
grantors.
Collection Accounts: When an account is referred
to collections because of delinquency or because of a
bad check, this appears on the credit report as a
collection account. Collection accounts can appear as
paid or unpaid accounts. Any type of collection account,
whether paid or not, is considered very negative by all
credit grantors.
Public Records: Public records include
bankruptcies, judgments, liens, satisfied judgments, and
satisfied liens. All court records, including
satisfactions, are considered negative by all credit
grantors.
Inquiries: Every time a potential credit grantor
looks at your credit file, a credit inquiry appears on
at least one of your credit bureau reports. If the
number of inquiries is very few over the last two years,
then there may be no negative effect on your credit
worthiness. However, if there are many recent inquiries
showing on your credit report, credit grantors may
become nervous and deny you credit.
How Long Will Negative Information Stay on My Credit Report?
The Fair Credit Reporting Act (FCRA) requires that most
negative credit items be deleted from your credit bureau
file in no more than seven years, except for a Chapter 7
bankruptcy which can be reported for up to ten years.
These are the time limits for reporting negative credit.
The creditor or the credit bureau can choose to have the
negative credit information deleted whenever they
please. Inquiries may remain on the credit report for up
to two years.
Lexington Law Firm is a professional credit repair
company that can help you with this.
Can I See My Credit Report?
Most credit grantors are not allowed by the credit
bureaus to show you your own credit report. But you can
purchase your credit report from the credit bureau for a
fee. Once you receive your credit report, you may find
that you cannot read it because the information is
listed in an unfamiliar code. Trans Union and Equifax
credit reports are particularly difficult to interpret
and understand. Experian credit reports, however, are
relatively easy for most people to read. Your best bet
would be to order a 3-in-1 combined bureau report since
they are the easiest to read. To order one, visit
www.creditrepair.com.
How Much Bad Credit Does it Take for Me to be Denied Credit?
As you may have already experienced, even one small late
pay listing may result in credit denials. It is a myth
that a large amount of positive credit can outweigh some
negative credit. Any negative credit whatsoever can
become a substantial credit obstacle.
Who Looks at My Credit Report?
With the passing of each year, your credit report is
used more and more often as a yardstick to measure your
character. Prospective creditors will always review at
least one of your credit reports before granting you
credit. Today it is increasingly common for insurance
companies to review your credit before extending auto or
health insurance. Many employers now check credit before
they consider you for a position. If you rent, you may
have already been through a credit check to determine
your worthiness as a renter.
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